Is it still possible to remortgage?
If 2009 is the year that your fixed or tracker mortgage comes up for remortgage then the continued deterioration of the housing market, including tougher lending criteria and falling house prices, might be causing you some worry.
Although no one knows exactly how many people will be in the position of having to find a new mortgage deal in 2009, the Council of Mortgage estimates it is in the hundreds of thousands range.
But with mortgage credit still tight, most will struggle to get a competitive new deal and many will find themselves stuck on their lenders’ standard variable rate. This is especially true for people who have slipped into negative equity, perhaps because they had a small or even no deposit when they bought, as well as those with poor credit histories.
So, how do you know exactly whether you will be able to get a new mortgage deal or not, and what are the options?
The Bank of England has decreased the official interest rates for four months in a row, staring with a 0.5% cut in October. Most recently, in January, the central bank’s Monetary Policy Committee reduced rates by 0.5% to 1.5%.
Despite the cuts, not all existing mortgage borrowers have benefited. Several lenders, including Nationwide, have not passed on later cuts to their tracker customers because a clause in their terms and conditions allow them to impose a floor, or 'collar', below which the rate will never fall.
And with each month and interest rate cut that passes, fewer numbers of lenders are reducing their SVRs – despite pressure from the government to help borrowers.
New mortgages have not been much improved by rate cuts either; expert says that lenders are only likely to reduce the cost of new deals by 0.1% or 0.2% following January’s 0.5% base rate cut.
And even though the slight fall in rates will, no doubt, be welcomed in some quarters, the fact remains that lenders are still demanding large deposits from borrowers before they will consider them for the most competitive loans – if at all.
According to John Postlethwaite, consultant at Punter Southall Financial Management, the funding that lenders use to price tracker mortgages (known as Libor) has fallen to 0.6% above the Bank of England base rate while SWAP rates (which lenders use to price fixed-rate deals) have fallen to below 3.2%.
But despite cheaper funding, rates on new mortgages show little sign of budging.
“I understand that banks and building societies are reluctant to lend at the moment, and they will say that they are charging much higher margins than they used to in order to protect savers. But they should be encouraged by the government to reduce these margins,” says Postlethwaite.
For people looking to remortgage, falling house prices pose a major concern. People who have built up a decent stake in their homes may now find this equity has been diminished. They may even have fallen into negative equity territory.
All this will make it harder for you to find a new mortgage.
John Phillips, financial services director at Kinleigh Folkard & Hayward, says that lenders are now starting to offer low deposit mortgages (10%) – but these are few and far between and could have hefty interest rates.
But on the plus side, Phillips says: “The start of the new year will see lenders releasing new mortgage products onto the market, and January’s drop in interest rates may well influence the products that become available in coming weeks.”
If you need to borrow more than 75% of your property’s value (i.e. you only have a 25% equity stake or deposit) then brokers say you are unlikely to be offered a competitive tracker mortgage rate, these deals being reserved for the “best” borrowers.
Ray Boulger, senior technical manager at John Charcol, says tracker mortgages are the ideal mortgage product at the present time (see below).
But he adds: “Borrowers needing in excess of 75% loan-to-value will find very little choice, and none above 80% LTV.”
Rates on tracker products are also set to rise as a result of the lower Bank of England base rate, says Louise Bond, personal finance manager at uSwitch.com.
She argues that, ahead of the vote on Thursday 8 Janaury, HSBC increased its tracker rate from 3.64% to 3.95%, while other lenders pulled their tracker ranges for re-pricing.
Andrew Montlake, a partner at independent mortgage broker Cobalt Capital, believes interest rates are very close to the limit at which lenders can profitably offer mortgages.
“The products offered in the next few months could be the best we are likely to see in the current cycle,” he explains. “People who opt for a fixed-rate mortgage now could do very well, as interest rates will have to rise, perhaps as quickly as they have fallen, once we begin to exit the recession."
But Boulger says fixed rate mortgages still look expensive and haven’t fallen a great deal in price since December despite swap rates falling to record lows.
“The time to switch to a fixed rate may well come this year but we are not there yet,” he says. “For specific individual advice borrowers should speak to an independent or whole of market mortgage adviser.”
* Start looking early
If you need to remortgage in 2009 it makes sense to start looking for a new deal around seven months in advance, especially if you aren’t sure of your position. However, it is worth speaking to a mortgage broker as they may advise you to wait.
* Check how long offers are valid for
If you have low equity then you risk your property losing more value by waiting, so there is a real reason to secure a deal in advance. Some lenders, such as Nationwide and Abbey, make mortgage offers that are valid for six months, although many are only valid for three or four months so make sure you take this into consideration.
* Take fees into account
Also, make sure you take any upfront fees into account. For many people, it makes sense to secure a deal now and then you can also search again nearer the time to see if you can find a cheaper product.
Lenders such as Nationwide and Halifax offer free valuations and have no upfront fee, whereas providers like Abbey charge £199 of your booking fee upfront (valuation is free however).
* See what your current lender will offer you
Speak with your current lender before you start looking for a new deal. Some may be prepared to offer their existing customers a new deal even if the equity they have in their home wouldn’t qualify them for a mortgage if they were a new borrower.
You can either contact your lender directly or ask your mortgage broker to do so on your behalf – some lenders have online system that brokers can access to get an instant answer.
* Get ready for a valuation shock
Remember that there could be a difference between how much you think your property is worth and how much the lender’s valuer thinks it’s worth. The bottom line is, what the valuer says goes. But you could be in for a nasty shock so it is worth checking with local estate agents or online to get a rough idea of the value of your home in the current climate.
* Should you fix or get a tracker deal?
The issue for many people who are able to remortgage is whether to opt for a tracker or a fixed-rate deal.
John Charcol's Ray Boulger says that unless you have at least 25% equity in your property, then you are unlikely to qualify for a tracker mortgage.
However, if you do qualify, then Boulger recommends opting for a tracker without a rate collar and with a droplock option. This latter feature allows you to switch to a fixed-rate at anytime without penalty. Both Cheltenham & Gloucester and Woolwich both currently offer this type of deal.
Nationwide, meanwhile, offers the droplock option but imposes a collar.
Alternatively, opting for a tracker mortgage with no early repayment charge is a good way to ensure you can switch to a fixed deal when interest rates start to increase. But Boulger warns very few lenders currently offer this option.
If you decide (or are forced) to go for a fixed-rate mortgage, then Boulger recommends you choose a short-term deal as fixed-rate mortgages are expected to get cheaper later this year or next.
“Now is not the time to lock into a long-term fixed-rate mortgage,” he explains. “However, there may well be an opportunity to do so over the next two years.”
* What about SVRs?
If you are unable to remortgage, then your only option is to go onto your lender’s standard variable rate. All mortgage contracts, other than lifetime trackers, have a ‘revert to’ rate in them; this will either be a normal SVR or a tracker rate.
Although this isn’t an ideal situation, there is no cost involved in being moved onto a SVR and you can leave at any time without penalty.
uSwitch's Bond says: “With more and more existing borrowers set to fall into negative equity in 2009, those looking to remortgage will find few, if any, lenders willing to take on this level of risk. People coming to the end of their existing deal should seriously consider defaulting to their provider’s SVR as this could be more cost effective than paying hefty fees for what could be a more costly option.”
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.