Much consternation in media today following the Daily Mail’s front page story about helping so-called mortgage prisoners trapped by negative equity. John Humphries on the Today programme seemed particularly exercised by the idea when interviewing our own David Hollingworth.
So what’s going on? And would a rather stretched metaphor help any?
The first thing to bear in mind is that at the time of writing none of this is official. There’s no reason to suppose it’s not true but without seeing the full detail it’s easy to get misled by speculation. That aside, on with the metaphor . . .
In a lot of cases, the equity in someone’s house isn’t so much an asset or accumulated wealth, but more of a bridge. It’s what enables you to get from one situation to another – to buy a new house, say, or remortgage onto a lower rate. Equity is what enables you to get from where you are, to where you want to be.
Unfortunately for many people the recent financial storms have wiped that bridge out. They may have done all the right things – never missed a payment, put down a decent deposit and so on – but through no fault of their own that equity has gone. They’re simply stuck where they are.
Now, at the risk of infuriating stuck homeowners, negative equity in and of itself isn’t necessarily a problem. If you can stay where you are, and wait for prices to improve and your mortgage to reduce, you’ll come out the other side no worse off. It’s like falling share prices – you haven’t actually lost anything until you sell.
To use the Mail’s phrase, you might be in a mortgage prison, but it could be a nice, comfortable open prison. It’s the one you chose to buy, after all. Negative equity isn’t necessarily Strangeways. So sit tight, and all will be well.
The problem comes, of course, when sitting tight is simply not an option, and you have to move. To return to our now-vanished bridge, what if your company moves to the other side of the river? (not quite sure what the river is supposed to represent, to be honest, but bear with me). You really really need to move house for your work, but your equity – the bridge that will get you into that new place – is no longer there. Now your mortgage prison is a dark and gloomy place indeed.
And that’s what these suggestions seem to be aimed at (but again let’s remember this isn’t concrete yet). To stretch the metaphor to breaking point, the proposal is that for particular borrowers with a specific need to move, lenders build a temporary pontoon (or possibly lend them a small dinghy) that will enable them to get where they need to be.
But they still won’t have a bridge, they’re not getting something for nothing as many seem to fear. If they want a new bridge they’ll have to build it for themselves. Or wait until the winds of fortune and tides of house price inflation build up a natural causeway of course.