Finding your way through the mortgage maze
The mortgage market has been through a lot in the past few months. As the credit crunch continues to hurt banks and other mortgage lenders, the availability of credit has shrunk. Some players are no longer around, while others have suspended new lending; put up rates and tightened criteria.
At the same time, house prices are waning – the latest figures from Halifax show prices fell by 2.5% in March – and are likely to continue to do so throughout 2008.
All this means that, for many people, now is not a good time to buy or sell a property. But for some, this is not an option. Perhaps you are a first-time buyer desperate to get on the property ladder, or already a homeowner looking to upsize or move to a different area? Or, you might be a homeowner happy to stay in your current house but nearing the end of a fixed or discounted deal.
Whatever your reason for needing home finance, here is the Moneywise guide to finding your way through the current mortgage maze.
Just a year ago, first-time buyers had a helping hand onto the ladder thanks to products from several mortgage lenders offering loans up to 125% of a property’s value. Not only did this do away with the need to save for a deposit, but it also helped stretched borrowers afford the costs associated with buying a home such as stamp duty and legal fees.
However, the continuing credit crunch has seen lenders pull 125% deals. Abbey is the latest, withdrawing its product offering buyers 100% of a property’s value.
Although lenders say these products have been pulled because of a lack of demand, this type of lending is seen as risky - and risk is something all banks and building societies are keen to avoid at the moment. There is no evidence to suggest that people borrowing a high proportion of their property are more likely to default on payments, but in a climate where house prices are falling, 100% and 125% deals put buyers at risk of negative equity.
Bank of Ireland and Bristol & West continue to offer a 100% deal, but to qualify first-time buyers must get their parents to guarantee their loan.
As David Hollingworth, from brokerage London & Country, points out, the near disappearance of 100% deals means first-time buyers now have little choice but to save for a deposit before trying to get on the housing ladder.
At the very least, this should be 10%. Lenders such as Nationwide, Halifax and Barclays (through Woolwich) will lend mortgages up to 95% of a property’s value, but borrowers will have to pay more for these.
Hollingworth said: “If buyers don’t have a deposit then they should start to save for one now – as always, the bigger the deposit the cheaper the mortgage.
“The upside is that there is no rush – house prices are falling, so there is no longer the mad panic to find a property that we’ve seen in the past few years. First-time buyers have time to consolidate their position and save a deposit.”
Moving up the ladder
With fewer options available to first-time buyers, many are sitting tight waiting for further house price falls and cheaper mortgage deals.
This is bad news for people already on the housing ladder looking to sell and move up a few rungs.
Without new blood getting on the ladder, the housing market chain is broken and people looking to upsize may find it difficult to find a buyer.
Many might be considering selling their properties and renting until the market eases up a little. But this strategy isn’t for everyone and could backfire should prices in the region you are looking to buy in stay static or even rise.
If you do need or want to move, then the good news is you are likely to have seen the value of your current home increase over the long-term, meaning you’ll have some equity to put into a new house.
Hollingworth said: “People should be realistic about the value of their current home and how much they can afford. The good news is there is an opportunity to haggle on the price of your purchase.”
When it comes to arranging a mortgage, you may still find that prices are higher than they were a few years ago. Historically, mortgage rates remain low but you may have to adjust your expectations of how much of your income goes on mortgage repayments.
Shopping around for the best deal remains important when finding a new mortgage – but bear in mind that products are being pulled on a daily basis at the moment, so if you see a product you like it’s important to act quickly.
Fixed products remain the most popular type of mortgage, but according to figures from the Council of Mortgage Lenders, tracker rates increased in popularity in February as buyers forecast interest rate cuts.
Hollingworth says fixed rates will continue to be popular among borrowers, as these offer certainty.
If you do decide to fix, then you can choose for how long - two and three years remain the most popular, but many lenders now offer five to 25-year fixed rates.
Research from Abbey found that 24% of borrowers would opt for a five-year fixed deal in order to protect themselves from market uncertainty.
Nici Audhlam-Gardiner, director of mortgages at Abbey, said: “Recent reports about the shrinking mortgage market seem to have had a profound effect on borrowers. Not too long ago borrowers felt that shopping around regularly was the way to get the best deal, now homeowners faced with a dwindling number of mortgage deals seem keener then ever to lock themselves into a deal for longer than two years such as a five-year fix.”
If you do decide to fix for five or even 25-years, then bear in mind that this will give you less flexibility to move. And if interest rates are cut then you could end up paying more than you would have with, say, a two-year product.
If your fixed or discounted mortgage deal is up for renewal but you aren’t looking to move, then as always it makes sense to remortgage rather than stick with your lender’s expensive standard variable rate.
As with new mortgages, remortgage products are flying off the shelves with increasing speed and rates are creeping upwards. In fact, because remortgages currently make up 45% of the total mortgage market, lenders are reluctant to offer market-leading products as they do not want to attract too much business at this time.
Normally, mortgage brokers recommend people coming up for remortgage start shopping around two or three months in advance.
However, at the moment it might be worth starting to look for a new mortgage around six months before your current deal ends.
Ray Boulger, from mortgage brokerage John Charcol, says most mortgage offers are valid for between three and six months, so anyone whose deal is coming up for remortgage this year should start looking now.
This will give you a chance to review all products coming on (and off) and market, so you can grab a good deal should one become available.
The downside is, of course, that if you do opt for a deal in advance and then change your mind then any fees you have paid upfront for valuation will be lost.
Unless you are prepared to write off these losses, then you could decide to only consider deals that don’t include any upfront costs. However, this will limit your choice.
Interest rates are likely to fall in the future, but Boulger says that people looking for tracker deals shouldn't assume that they should wait until rates get cheaper.
He said: "Even if interest rates do fall, this doesn't mean tracker rates will get cheaper. In fact, prices are unlikely to improve in the short-term."
In addition, if the value of your property falls in the near future, then you may be forced to remortgage onto a higher loan-to-value (the percentage of your property's value) and therefore pay a higher rate of interest. By securing a deal now, this scenario could be avoided.
However, Boulger adds that if you want to move onto a fixed rate deal then it might be worth sitting tight for a bit.
He explained: "If interest rates fall, as economists think they will, then there is an argument for people to hold off as fixed rates could get cheaper later in the year."
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.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
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.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
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.