Nearly 2 million homeowners face negative equity, Standard & Poor's warns

Seventy thousand UK homeowners are already in negative equity and a further 1.7 million will join them over the next year if house prices fall as far as expected, Standard & Poor’s has predicted.

The stark warning, contained in a new S&P report, is based on the ratings agency’s own forecast that UK house prices will tumble a further 17% from their current level.

Significantly, buy-to-letters would be the hardest hit by a sharp fall in house prices, the report predicts. This is because buy-to-let owners have a higher average loan-to-value (LTV), at around 70%, compared to 54% for owner-occupiers. Many buy-to-letters have also taken out interest-only loans.

Around one in five buy-to-let investors would be in negative equity if prices fell by the expected 17%, S&P said.

As an ‘approximate rule of thumb’, S&P said it expects a further 0.5%-1.5% of all mortgage borrowers to enter negative equity for each full percentage point drop in house prices.