UK banks fear return of negative equity

With the latest increase in interest rates announced by the Bank of England this week many UK lenders are cutting back their exposure to a potential fall in house prices throughout the country. With house price increases in the UK finally showing signs of a slow down (except in the London area) HSBC is leading the way by insisting that borrowers now put up a deposit of at least 10 percent.

The fear at the moment is that 900,000 UK borrowers will be coming off fixed interest loans in the next year – at that point most will be exposed to monthly increases of between 50 percent and 75 percent more – much more than many borrowers have budgeted for. Ironically these very same borrowers are the most vulnerable group, mostly first time buyers or young couples starting new families.

The move by lenders comes hot on the heals of the very same lenders offering multiples of fives times or more a few months ago – some might recall the term ‘irrational exuberance’, though such is the way markets work just prior to the bubble bursting.

The jury is still out whether there will be a further rate increase in the next few months, though lenders are confidently predicting that the market won’t crash even if there are further increases.