Negative equity is new fear for Rock
Aug 5 2008 By Graeme King, The Journal
UP TO 140,000 Northern Rock homes could be in negative equity within the next 18 months.
Some customers borrowed up to 125% of the value of their home from the Newcastle-based bank before the run on it last year.
Now, with house values falling across the country, it is feared the Government-owned institution could be forced to repossess houses.
A report yesterday said 5% of those with mortgages from the Rock already owe more money to the bank than their home is worth – the definition of negative equity.
And now with predictions that house prices are set to fall by up to 20% by the end of 2009, another 15% of Rock mortgage holders will slip into the same territory, adding up to 140,000 homes nationwide.
As long as Northern Rock customers keep paying their monthly mortgage payments, they will be able to hold on to their homes.
But the danger is that as the amount of those payments rises, together with other household bills rising, many mortgage holders will not be able to afford to keep up – and lose their homes.
For a long period, a large proportion of Northern Rock customers took out a ‘Together’ mortgage product, which involved a 95% loan to value (LTV) mortgage, with an unsecured loan on top of that.
Yesterday, a day before Northern Rock reports financial results that could see it reveal a half-billion pound loss, an experienced mortgage broker said the bank was likely to be the most exposed of the big mortgage lenders to negative equity as it had done so much lending with the Together product.
Ray Boulger, of broker John Charcol, said: "Certainly Northern Rock seem to be the most exposed in terms of negative equity, as 25%-30% of their business was in the Together product. Those who took out a Together mortgage in the last two years will be either in, or close to, negative equity."
Another broker backed Mr Boulger’s analysis.
David Hollingsworth, of London & Country, said: "The Together product was, for quite some time, the Rock’s flagship product, and for a long time they were the only ones in that market.
"People would take a 95% mortgage with a 30% loan on top. A lot of people who took that product will have enjoyed the good times of rising house prices, as well as the more recent falls.
"But in the last year or two years, Together customers will find themselves with nowhere else to go.
"When those Rock customers come to the end of their deal, they will get switched to the standard variable rate of 7.49% which will mean a leap in the interest rate they pay – and they will have little or no option in terms of going elsewhere."
Mr Hollingsworth gave the example of a family who took a £150,000 repayment mortgage in 2006, for 25 years at a fixed 6%, and initially paid £966.45 per month. Now they stand to be switched to Northern Rock’s standard variable rate of 7.49%, and a repayment of £1,107.51 – a rise of about £140 per month.
Mr Boulger said the prospect of Northern Rock having to repossess homes was a worrying one for the Government.
A spokesman for Northern Rock declined to comment.
For previous stories about Northern Rock, click the links below
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