Lenders have warned that lack of equity in the housing market will cause as many as 2 million homeowners to either have negative equity or too little equity to afford to move.

The research conducted by the Council of Mortgage Lenders (CML) also warned that these problems could lower the number of houses on sale.

It also found that two thirds of 900,000 that fall into the category of negative equity’s shortfall is by less than 10% - around £6,000 of these are first-time buyers, and around £8,000 are other homeowners.

Head of research at CML, Bob Pannell has said: “Although negative equity has resurfaces as house prices have fallen, one big difference from the early 1990s downturn is that it is less concentrated among young, first-time buyers, and more evenly spread across wider age groups and those at different points on the housing ladder.

“Negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected.”

As Bad As The 1990’s Crash?

Lenders are still restricting their lending due to lack of mortgage funds, few are prepared to accept a 10% deposit from anyone buying a house.

According to other recent research conducted by Moneyfacts, there are currently only 106 mortgage deals that require a 10% deposit or less. On the other hand, two thirds of deals – 1,485 – require customers to have a deposit of at least 25% of the cost of the home they intend to buy.

This will have a huge impact on those planning to move home, even if they have limited equity of less than 10% they are unlikely to be able to afford to move.

CML have predicted that around 600,000 mortgage holders will have less than even 5% equity on their homes. It also thinks that around 500,000 have equity of between 5% and 10%. Therefore it believes that around 2 million homeowners could not sell their own homes in order to raise the equity to put down a deposit on a new home.

House prices have already dropped around 18% since mid-2007, already outstripping the national price drop of the early 1990s price crash. However, the estimated 900,000 people suffering from negative equity now is still a lot lower than the 1.5 million thought to have been in negative equity in the early 1990s.

Only a Problem If You Want To Move?

Of those that are currently in negative equity, about 270,000 are thought to have a loss of around 10-20%, and around 30,000 are believed to have a deficit of over 20%.

In the worst cases the negative equity averaged £28,000 for first-time buyers, and £37,000 for other homeowners.

The CML say: “payment problems are typically associated with unexpected spending commitments, reduced income and changes in household circumstances.

“Negative equity, on the other hand, only surfaces as a problem if households need to move, or are also experiencing repayment difficulties.”

What Do You Think?

We would love to know your thoughts. Comment here.