The problem is largely due to mortgage borrowers at the lower end of the housing market getting into financial difficulty then taking out secured loans against their property to try and ease their debt worries.
This means that when they come to sell, the amount they owe on their home loan can be significantly more than the value of their house or flat.
In the 1990s, a fall in property prices following a housing boom was the main reason homeowners found themselves in negative equity, but this time the situation is primarily down to the huge amounts of personal debt people are accruing.
To try and consolidate their debts and make it easier to meet commitments such as car loans, overdrafts, personal loans, credit cards and store cards, hard pressed first time buyers – who often already have large mortgages – are choosing to remortgage or obtain further finance secured against the property.
With house prices still rising, there is a temptation among people struggling to meet their financial obligations to use their homes as a source of raising much needed extra funds
This, however, can lead to serious problems when they come to sell, for although some lenders will allow borrowers to change their secured loan into an unsecured loan just so the property can be sold, others will not.
Homeowners who find themselves with two secured charges against their home may not be able to sell at all – and those who do put their homes on the market will be reliant on achieving at least the asking price to receive any money at all.
To determine levels of personal debt, we now ask our conveyancing clients to provide us with details of any outstanding loans so we can assess their financial health before they proceed.
This is not something we were doing a year ago, but given the increase in negative equity cases resulting from debt troubles, it is an issue people need to think about carefully when considering putting their homes up for sale.
Taking out a second secured loan against their home can leave borrowers vulnerable – and with a home they cannot sell. The situation is very depressing and there is little we can do as lawyers – apart from recommend that homeowners with money problems seek help from a debt counsellor.
Bricks and mortar may appear to be the answer, but borrowers in financial difficulty would be better advised to look at ways of tackling their personal debt first.