10,000 homeowners at risk of becoming ‘mortgage prisoners’ as negative equity ‘time bomb’ looms

These properties are most at risk of falling into negative equity, with house prices set to fall by seven per cent by the end of the year, the Office for Budget Responsibility has forecast.

In 2021, just 2.26 per cent of homes were bought with a loan-to-value (LTV) ratio of 95 per cent, but the FCA expects the figure will be 4.25 per cent in 2023, The Telegraph reports.

It would mean 10,650 homeowners are at risk of sliding into negative equity if house prices drop.

Sarah Olney, the Liberal Democrat spokesman for the Treasury, said: “Soaring mortgage rates combined with falling house prices are creating a negative equity ticking time bomb.

“Those falling into negative equity face becoming mortgage prisoners, trapped in their home and at risk of being hit by higher rates.

“Ministers and the regulator need to come up with a plan to help homeowners on the brink.

“The Conservative government crashed the economy and sent mortgage rates through the roof, they have a responsibility to help those now paying the price.”

Negative equity can happen when the value of a property falls below the amount borrowed to pay for it.

Borrowers with negative equity can lead to them becoming “mortgage prisoners” because they cannot sell the property without having to make a big payment to the bank or lender.

It can also be a challenge to remortgage once a fixed-rate mortgage deal ends for borrowers with negative equity, potentially forcing them onto a more expensive rate.

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The Liberal Democrats are urging the Government to create a mortgage protection fund to support the most vulnerable mortgage holders, suggesting it would be paid for by scrapping the Conservative party’s £3billion tax cut for big banks.

A Treasury spokesperson said: “The best way to help homeowners is by bringing down high inflation, and this year we have succeeded in our pledge to halve it.

“To support mortgage holders struggling to afford high interest rates, we have put in place one of the largest cost of living support packages anywhere in Europe worth on average £3,700 per household.

“We have also introduced the Mortgage Charter, which can make it easier to manage monthly repayments and gives extra protections to homeowners.”