First-time buyers trapped in property as prices fall

Tuesday, 09, Oct 2007 08:49

One in 20 first-time buyers may be trapped in their new properties if prices stagnate, according to new research from Fool.co.uk.

According to the Halifax prices fell by 0.6 per cent in September - the first fall for nine months.

The study also found annual house price growth has fallen from 11.4 per cent in August to 10.7 per cent today.

While these falls will not be of great concern to the majority of those who purchased a property in the last 12 months - who will still have seen average prices rise - there are concerns for first-time buyers who took out 100% mortgages more recently.

It is estimated one in 20 first-time buyers take out these mortgages to cover the total cost of their home.

Now, with falling prices, there are concerns for these buyers.

Recent homebuyers could slip into negative equity, making it impossible to sell - as the value of the mortgage is greater than the value of the property - trapping buyers in their homes.

"Borrowers on 100% mortgages need to be aware stagnant house prices may keep them shackled to their uncompetitive lender and prisoners in their own home until house prices rise again," commented David Kuo, head of personal finance at Fool.

"However, they can tip the scale in their favour by ensuring that they choose repayment mortgages rather than the cheaper interest-only options.

"They should also overpay their mortgage as often as they can afford. This will ensure that they are regularly chipping away at their debt."

Some 100% mortgages are also expensive, with rates tending to average around 6.5 per cent - a full percentage point above the market average according to Fool.

"100% mortgages are supposed to provide first-time buyers with a helping hand onto the housing market.

"But in a market where house prices stagnate or fall, what providers give with one hand may be taken back with the other when the mortgage deal ends," concluded Mr Kuo.