After a housing downturn, buyers can face negative equity while rising defaults place lenders and borrowers in difficulty.
Location Value Mortgage Rescue would form part of a stabilisation process. It replaces part of a bank mortgage with a debt-free Location Value Covenant, moving monthly outgoings from a variable-interest loan towards an index-linked payment attached to the property owner.
Although part of the loan is written off, the covenant creates a continuing public asset intended to benefit the bank, homeowner and government.
Worked example
Peter bought a £300,000 house in 2007 with a £250,000 mortgage costing £1,400 per month. The house is now worth about £225,000. His insolvent lender faces rising defaults. Government removes £150,000 of Peter’s mortgage in exchange for a £520 monthly covenant linked to local rental values.
| Measure | Before rescue | With rescue |
|---|---|---|
| Bank mortgage | £250,000 | £100,000 |
| Debt repayment | £1,400/month | £700/month |
| Covenant | — | £520/month |
| Total payment | £1,400/month | £1,220/month |
| Illustrative saving | — | £180/month |
| Value after covenant | £225,000 | £100,000 |
What the intervention changes
Peter’s negative equity is addressed, his payments are manageable and default becomes less likely. If employment and location values fall, covenant payments also fall.
If Peter sells, the price clears the remaining mortgage. A buyer with a £50,000 deposit needs only a £50,000 bank loan and pays about £870 per month across mortgage and covenant. An otherwise identical home without a covenant costs £225,000 and requires much more debt.
Financial values, rates and tax references restyle the original policy example. They explain the proposed mechanism and are not current financial, tax or legal advice.