This year one in four homeowners will see the value of their home fall so dramatically that it will be worth less than their outstanding mortgage. That’s the stark prediction from the Financial Services Authority. They expect 2 million homeowners and 500,000 buy to let properties to fall into negative equity.

These warnings were released as reports showed that mortgage lending had slumped to an 8 year low. The report from the Council of Mortgage Lenders shows how the UK’s housing market is stagnating as banks hold back mortgage lending despite lower prices and the lowest interest rates for more than a generation.

And at the same time the magazine Which? Warns that 35% of homeowners are worried about repossession. But despite these worries, relatively few homeowners have taken out insurance to cover their mortgage repayments in the event of redundancy. With unemployment predicted to rise by 50% this year to 3 million, surely more should take out this insurance?

And whilst writing about the curse of negative equity, we think it best to clarify one commonly held misconception. If your home is sold for less than its outstanding mortgage, you are still personally liable to repay the shortfall. The lender will chase you for the shortfall money. This applies even if the lender had forced you to accept a “Higher Lending Charge” when you arranged the mortgage.

Higher Lending Charges are in effect an insurance policy owned by the lender, which guarantees to the lender that if the sale proceeds of a property do not fully repay the mortgage, the insurance will repay the shortfall to the lender. You will note that the policy belongs to the lender – it eliminates the risk that the lender will not be repaid. Please note that the policy does not belong to you the person who paid for the insurance.

The hard fact is that if there is a repayment shortfall, you are still legally bound to repay that money to your lender and the lender then forwards that money on to the insurance company which underwrote the Higher Lending Charge policy.