Recent rises in interest rates and the corresponding decline in property prices as a result of the credit crunch have sparked fears that the spectre of Negative Equity has risen again to torment a new generation of first time buyers and homeowners.

According to a document from Morgan Stanley published in the Telegraph in April this year, UK house prices could drop by some 15 per cent over the next two years, which would drive over a million households into negative equity.

Negative equity is the term used to describe the situation when the value of a house or property drops below the amount outstanding owed to the bank or mortgage lender; essentially it means homeowners have to pony up bigger amounts of interest on their repayments and end up paying out more in the long term.

This is not necessarily a problem, so long as you can keep up with repayments, but in extreme cases, Neg Eq can see homeowers unable to hope, which can see them facing repossession – the added restrictions on lending as a result of the current financial climate means that taking out additional loans and borrowing on cards (not advised at any time, credit crunch or no) simply makes the situation seem worse.

Whilst were on the subject of credit cards, possibly the worst thing you could do is take out a mortgage if you are already struggling to keep on top of several cards worth of debt – sort this out before you even think about moving house. If you don’t, then you might not even get as far as receiving a mortgage in the first place; read our page on credit reports and ratings for more info.

Negative equity poses the greatest threat to those first-time buyers who purchased a property in the pat 12 months with a 100 per cent mortgage – this underlines the importance of first-time buyers saving up toward putting down 5 to 10 per cent of the value of a property before applying for a mortgage. The more you put down, the less you have to pay back in the long run.

Despite this bleak outlook, it is possible to survive a period of depreciating value and emerge unscathed, and there are a number of factors unique to the UK housing market which may help to allay the effects of negative equity. Chief among these is the fact that in the UK, demand for housing and accommodation still outstrips the supply by a fair amount.

Taking this into consideration means that letting out a spare room, if you have one, is a viable and lucrative option. Under the current rent-a-room allowance scheme, you can claim up to £4,250 a year tax-free from a lodger – the Inland Revenue booklet IR 87 has more information on this, and it downloadable for free from www.hmrc.gov.uk/leaflets/menu.htm.

You can also help turn the tide by way of making minor repairs to raise the value of your house – it really is amazing what a difference a fresh coat of paint and new wallpaper makes to the value of a house.

There are ways to work around a shoestring budget to make your life seem less Spartan – simply getting into the habit of turning all appliances off at the wall before you go to bed can drastically reduce energy bills. Things like Sky+ boxes and Freeview tuners with Playback will have to be left on if you’ve set recording timers, but if you’re not recording anything for the next couple of days, turn ‘em off before you go to bed.

Of course, you shouldn’t turn things on and off at the mains as and when you use them, as this places strain on electronic equipment, and could lead to them being damaged; you’d then have to pay for it to be repaired, or buy a new one, sort of defeating the object of saving money! If you work at a computer in an office environment (who doesn’t these days?) you could sneakily charge your MP3 player through the USB port – I’ve been doing this since I started my new job recently, and have not charged my Creative Zen at home at all since. Bring your phone and/or iPod charger into work and leave it on charge during the day, or if you commute in on a Virgin train, make use of their mains sockets – why pay for electricity when you don’t have to?

Thinking of mortgage repayments as rent can also help crystallise the situation – as soon as you move in, you might feel as though the house is yours, but in reality it effectively belongs to the bank until you’ve paid them all off. Looking towards that day when you will eventually own the house is like the light at the end of the tunnel – think of ways which can help you reach the end faster and pay off as much of the mortgage as you can afford – the majority of mortgages will allow you to repay amounts usually of up to 10 pc of the outstanding balance.

This entry was posted on Sunday, June 1st, 2008 at 9:22 am and is filed under Housing Market, Mortgages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.