Rising living costs, coupled with the rising rate of inflation, are putting household budgets under a whole lot of stress. And let’s not forget about the rising rate of interest that is further adding to the elevated budget. Estate agents in York believe that many homeowners run the risk of falling into negative equity by 2023. In simple words, if the mortgage owed on a property exceeds the value of the property, then the owner of the property is said to be in negative equity. So, why are experts predicting that homeowners in the UK are set to be in negative equity in 2023?
Market experts predict that over 80,000 homeowners in the UK could be forced into negative equity in 2023 if the price of property drops. Essentially, buyers who purchased a home in the UK at a 1 per cent deposit in 2022 run the risk of falling into negative equity as the value of their property will be less than the value of their mortgage. In fact, experts have predicted that a whopping 16 per cent of homeowners in the UK who are between 16 to 34 years of age could be trapped in negative equity in the coming year if the prices in the UK drop by 8 per cent, or more. Similarly, new buyers who bought a property with a 5 per cent deposit also run the risk of going into negative equity even if the property prices in the UK drop by less than 8 per cent. The situation is also not looking too good for homeowners who are looking to buy a new property in 2023 as the rate of inflation is rising rapidly and the interest rates are soaring too.
Now, if a homeowner is trapped in negative equity in 2023, he or she might choose to sell the property to avoid further losses. However, negative equity means that a homeowner will find it very difficult to sell their property or even remortgage their property. If a homeowner decides to sell the property, he or she will have to pay off the current mortgage at a loss. And, if a homeowner decides to remortgage the property, he or she will probably be switched to a higher variable rate of interest by the lender as opposed to a fixed-rate deal. Predicting the scope of negative equities, many banks and lenders have started to withdraw the 5 per cent deposit mortgage. Most banks and lenders are now asking for a larger deposit to protect their own interests.
But, why are homeowners set to be in negative equity in 2023? The rising mortgage rate, coupled with the rate of inflation, the increased cost of living as well as the consistently rising rate of interest, have certainly taken their toll on the UK economy. Now, with falling property prices and rising mortgage rates, homeowners could go into negative equity. If we look at the data of property prices in the UK in the past few months, the average price of property rose by a whopping 15 per cent in July 2022. However, in 2023 experts are predicting the average price of the property could drop by 5 per cent, 8 per cent, 10 per cent, 12 per cent or even a whopping 30 per cent. This is directly linked to the mortgage rates in the UK. If we assume that the mortgage rates in the UK will be around 6 per cent in 2023, which seems to be the likely scenario, then the average price of a property in the UK will fall. Since the purchasing power of potential buyers will decrease drastically, so will the demand, which will directly impact property prices.
However, this is a silver lining. Purchases made during the Covid-19 pandemic as well as after the pandemic, were not made with a large mortgage. In fact, most new homeowners and new buyers used savings and equity to put down large deposits, which in turn reduced the mortgage amount. For such buyers, the risk of going into negative equity is rather low. With that being said, new buyers who opted for low-deposit mortgages, especially in 2022, could see themselves falling into negative equity. If the price of property falls by 10 per cent in 2023, buyers with high loan-to-value mortgages could go into negative equity.
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