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Official figures show around 1.3million bought a property in England in 2007 when prices reached an all-time high.

 

Their home is worth less than they paid for it and will remain so for another four years, according to the report from the National Housing Federation. 

Trapped; Those who bought a home at the peak of the market in 2007 will remain in negative equity until 2014, according to a new report.

 

It says a significant minority are in negative equity, with a mortgage bigger than the value of their property, giving them problems if they have to sell. The report warns that Britain is 'in the midst of the worst housing crisis for generations' and that house prices will fall again next year. 

 

The federation, which represents England's housing associations, raises fears that 'an entire generation of people will be locked out of the housing market as a result of high house prices'.

 

The number of first-time buyers slumped to just 199,000 last year, compared with nearly 600,000 in 1999. Only the rich, the well-paid or those with generous parents are able to get on today's property ladder.

 

The plight of those who bought in 2007 is highlighted in figures showing that the average house price in England then of £216,800 has fallen to £210,500.

 

The figures, compiled by the consultancy Oxford Economics for the federation, predict it will drop to £204,200 in 2011, rising to £206,400 in 2012 and £214,900 in 2013.

 

It will not be higher than the 2007 price until 2014, when it will hit £226,900.

 

The situation is even worse in some parts of the country. In the North-East, the peak price of £148,100 will not return until 2015. In places such as London, the East and the South-East, where demand for housing is more intense, prices will be back to peak levels by 2013.

 

David Orr, the federation's chief executive, said: 'For those who bought at the peak of the housing boom, there is a strong possibility they will have to wait another four years before their home is worth what they paid for it.

 

'For a significant minority in negative equity the consequences are devastating. They have a major problem if they need to sell.' 

 

The report, Home Truths, says the problems facing people who bought in 2007 are overshadowed by the greater crisis in the housing market.

 

House prices are around 120 per cent higher than they were a decade ago, which is keeping a growing number of people off the ladder.

 

Construction began on just 87,360 new homes in England in 2009/10, a third of the number of new households which are forming.

With mortgages predicted to hit 12%, borrowers may be wise to seek shelter now

Some homeowners will be panicked into changing their mortgage after an economist's prediction that the base rate could rocket from 0.5 per cent to eight per cent within two years, pushing mortgages to 11 or 12 per cent. 

 

Many experts have dismissed the report as scaremongering and warned borrowers not to be frightened into action. But with increases in interest rates widely expected  -  though not to such high levels  - borrowers are being advised to think about their options. 

 

Melanie Bien of mortgage broker Private Finance in central London says: 'If borrowers know they would struggle if rates started to jump, it is important to look at ways of preventing mortgage payments shooting up.' 

 

This is the only way to know exactly what your mortgage will cost each month, but you should consider fixing for longer than two years. 

 

If the base rate starts to rise, mortgage rates could be much higher when you come to fix again in two years. Five-year fixes start from about four per cent. HSBC has a deal at 3.95 per cent, though borrowers need at least 40 per cent equity in their property. 

 

David Hollingworth, broker at London & Country Mortgages in Bath, Somerset, says: 'Taking a two-year deal now with a big arrangement fee could be a false economy if you have to pay another big fee to remortgage in two years and rates have jumped.' 

 

Robert Lighart, 34, and Kirsten Ceely, 37, have switched to a five-year fix with Northern Rock at 4.59 per cent. The couple, from Dover, were paying Santander's standard variable rate (SVR) of 4.24 per cent, but have moved house and increased their mortgage so they wanted payment security. Robert, a call centre trainer for Eurotunnel, says: 'It's unlikely rates will jump to eight per cent, but a fixed deal gives us peace of mind. We don't need to worry about it now.' 

 

Sticking with a lifetime tracker or SVR loan with no early redemption charge allows borrowers to continue to enjoy low rates, but with the option to fix at any time without penalty. 

 

Most fixed-rate and short-term tracker deals have big penalty fees if borrowers want to remortgage during the term of the deal. Bien says: 'Remember, fixed-rate mortgages will become more expensive if you wait for the base rate to rise.' 

 

Another way to hedge your bets is to take part of your mortgage on a fixed rate and part as a tracker or variable rate. Many lenders allow this, but be wary as you may be charged two arrangement fees.

 

 

Borrowers can take out a tracker mortgage but retain the option to fix their rate with the same lender at any time without penalty. The fixed rate must be taken from the lender's own range and at rates available at the time. There could also be an arrangement fee to pay when you fix. 

 

 

Not much choice here, but Coventry Building Society has a two-year deal starting at 2.99 per cent for those with 25 per cent equity. The rate will not go higher than 3.99 per cent. The arrangement fee is £999. 

 

 

Homeowners can insure themselves against rising rates, but cover is not cheap. For example, a borrower wanting cover for a £100,000 repayment mortgage with protection against rates rising more than one percentage point over a two-year period would pay £34 a month with specialist insurer Marketguard. Brokers such as Savills Private Finance and Charcol offer interest-rate cap deals, but these are targeted at those with mortgages of at least £500,000.