A slump in British house prices next year could leave hundreds of thousands of families living in a property worth less than their mortgage, a think tank warned yesterday.
Almost 200,000 households will be trapped in negative equity next year if house prices fall by 8% as predicted, the Resolution Foundation has warned, leaving owners struggling to sell or remortgage.
The Telegraph says the figures are based on recent property price predictions made by Lloyds Banking Group, the UK's biggest mortgage lender, and the official Wealth and Assets survey conducted by the Office for National Statistics.
If house prices fall by 18%, as Lloyds forecast in its most-pessimistic scenario for the economy next year, more than 600,000 households will be trapped in negative equity.
The Resolution Foundation also said first-time buyers faced a doubling in lifetime mortgage interest costs because of the recent jump by the Bank of England in the interest rate to 3%.
Analysts said expected interest payments on a first property are now expected to be £153,000 - up from £74,000 for people who took out their mortgage in 2017.
35-year mortgages
Meanwhile, it has also emerged that cash-strapped home buyers are drastically increasing the length of their mortgages to 35 years or more in a bid to reduce monthly payments.
Paying a mortgage over a longer period than the traditional 25 years can significantly lower repayments, but this will also add huge amounts to the total interest paid.
Average mortgage rates have nearly tripled compared to this time last year as the cost of borrowing soared in response to surging inflation.
First Direct, part of HSBC, reports that applications from existing and prospective homeowners for terms over 35 years more than doubled in the first half of 2022.
TSB said it has seen an increase in homeowners taking out longer mortgage terms of 35 to 40 years over the past year.
And NatWest said that, when it raised its maximum term from 35 to 40 years in April. it saw an increase in people taking up the offer.
More interest to pay
Carl Watchorn, head of mortgages at First Direct, told the Telegraph: "Longer mortgage terms may be an option for customers who want to make monthly payments more affordable - however applicants will end up paying more interest over the lifetime of the mortgage."
The average two-year fixed mortgage rate was 6.45% on Friday, up from 2.34% at the beginning of December 2021.
The typical five-year deal rose from 2.64% to 6.28% during the same period, according to Moneyfacts.
A homeowner with a £320,000 mortgage on a deal fixed at 6.45% would save £229 a month by switching from a 25-year term to a 35-year term, according to broker L&C Mortgages. Their monthly payments on a 25-year term would be £2,151, compared with £1,922 per month on a 35-year term. However, they would also pay an extra £162,170 over the duration of the mortgage.
On a 40-year term the same homeowner would pay £1,862 a month - but £248,593 more in interest.
Adrian Anderson, of broker Anderson Harris, said this was an option that was typically only available to people in their 20s and 30s.
He said: "Most banks will require the mortgage to be paid off by age 70, so this is only really available to younger borrowers."
David Hollingworth, of L&C Mortgages, said older people may be able to secure longer-term mortgages if they can prove that they will be able to afford the repayments using their pensions, although most people will want to be mortgage-free by the time they retire.