Homeowners could be in for a rough ride as UK house prices are expected to fall 5.9% this year, according to the latest Hargreaves Lansdown Savings and Resilience Barometer.
The report warns that falling prices could push many homeowners into negative equity, make remortgaging harder and more expensive, and erode their retirement savings.
The firm also cautions that the government’s proposed scheme of 99% mortgages, which would allow buyers to purchase a home with only a 1% deposit, could increase the risk of negative equity.
The scheme would involve the government guaranteeing a portion of the loan to reduce the lender’s risk.
However, Hargreaves Lansdown argues that this would be a risky strategy at a time of falling prices, as it would reduce the amount of equity that buyers have in their home.
‘Falling house prices strike fear’
Sarah Coles, the head of personal finance at Hargreaves Lansdown, said: “Falling house prices strike fear into the heart of any homeowner. This isn’t just the worry of being less well off on paper.
“For those who have relatively little equity in their home, or a large mortgage, there are real implications both in the short-term, and in retirement too.”
She added: “Falling prices also take a toll on our resilience in retirement.
“Lower house values mean lower equity release options, lower inheritance, and lower downsizing potential.
“This could leave many homeowners struggling to fund their retirement lifestyle.”
Lower prices would reduce the owner’s equity
Remortgaging could also become more difficult and costly for homeowners as house prices fall as lower prices would reduce the owner’s equity stake – which could affect the mortgage rate they can get.
The report notes that mortgage rates are already much higher than they were when most homeowners fixed their loans.
The average two-year rate is around 5.5% and the average five-year rate is around 5.2%, according to Moneyfacts.
These rates are likely to drop further this year, but remortgaging could still significantly increase monthly payments.
Severe impact on homeowners’ finances
This could have a severe impact on homeowners’ finances, especially for Generation X, who have the highest monthly mortgage payments at an average of £863.
The report estimates that by the end of this year, one in four people with mortgages will be at risk of running into mortgage difficulties because their repayments make up more than a quarter of their disposable income.
Of these, 340,000 households will be at ‘high risk’ because they also lack enough emergency savings, and 390,000 will be at ‘critical risk’ because they also have unsustainable levels of spending.
The report urges homeowners to take steps to protect themselves from the effects of falling house prices, such as building up their savings, reducing their spending, and reviewing their mortgage options.