As house prices have continued to decline, homeowners have watched their equity evaporate.  Forecasts are calling for continued price declines through the year and next, with some warning of a five year decline.  Homeowners, as well as landlords, will find themselves in negative equity if they are not careful in watching the house prices and seeking to avoid problems.  

Landlords are especially vulnerable to negative equity as they are more likely to purchase with high loan to value levels believing this a good way to keep adding to their portfolio.  The demand for rental properties has been high, but declining house prices are a problem for them.  According to a report from Standard and Poor's, if forecasts are correct that there will be a 5 per cent decline in house prices this year and another 5 per cent next year, then 30 per cent of landlords that have purchased or remortgaged in the last few years will find themselves owing more on their mortgages than their property is worth.

If interest rates are increased by the Bank of England then many will be in jeopardy of finding it hard to afford their properties.  Furthermore, once a property nears or is in negative equity, then remortgaging is very difficult.  Securing a low interest rate with a remortgage would be a smart move by many landlords that are in the right situation.  

Mark Boyce, credit analyst at S&P, said: “In the near term, the buoyant UK rental market should continue to support buy-to-let borrowers, but interest rate rises are a risk on the horizon.

“Furthermore, even relatively mild house price declines over the next two years could place more than 30% of buy-to-let borrowers in negative equity, reducing their financial flexibility and thus risking a rise in arrears.”