Beat falling house prices
With house prices continuing to fall and showing no signs of slowing, people looking to remortgage this year could find they no longer qualify for the better deals as the equity in their homes gets eaten into.
Lenders are not only demanding bigger deposits from new borrowers – they also expect remortgaging customers to have a decent stake in the property before they will offer them a good remortgage deal. For example, most lenders will only offer tracker rates to people with 25% equity. The situation for people wanting fixed rates isn’t much better, with the best mortgages reserved for people with big equity stakes.
Even if you are confident you have enough equity to be eligible for a new remortgage deal, if you are close to the key lender thresholds then you may find the choice limited.
Ray Boulger, senior technical manager at John Charcol, says that 75% loan-to-value mortgages (i.e. 25% equity) is the key threshold. “People only seeking mortgages of 65% to 70% will have a wider choice,” he explains. “But people close to the threshold may struggle as house price falls could push them into higher loan-to-value requirements.”
People facing the prospect of remortgaging this year and next, could improve their chances by taking action now. There are ways to beat falling house prices and improve your chances of success when it comes to remortgaging.
1. Check your credit record
Before you start the remortgage process, it is worth checking your credit record to make sure there are no mistakes or fraudulent activity that could damage your chances of being approved for a new loan.
The credit crunch means lenders are reserving their best deals for the best customers – and that means people with clean credit records and no history of missing payments.
It’s relatively easy and cheap to get hold of your credit record and checking it can make a big difference. If you keep making applications for loans but get turned down then this will show up on your record, and could hurt your chances of being approved in the future.
So check you record before making applications. If there are any mistakes or suspicious activity then you can get these cleared up. And if you have damaged your credit score by missing payments in the past, then there are ways to repair your rating.
Find out how to repair your credit report
2. Repayment not interest only
If you are on an interest-only mortgage then your monthly payments are being used to clear the interest on the loan, not the mortgage itself. This means that the mortgage itself never gets any smaller and you won’t be building up any equity in your home.
In times of falling house prices this can be a problem, as the equity you do have will be diminished by falling values and could even leave you in negative equity.
Because people with the most equity in their property will get the best remortgage deals, it is worth trying to decrease your mortgage (thus increasing your equity) by switching to a capital repayment plan rather than interest-only.
This will mean your monthly payments will increase. Contact your lender to see by how much, and then do a budget to ensure you can afford it. Find out how to write a budget that works
Also, bear in mind that you may be charged a fee of up to £100 for switching to a capital repayment model.
In addition, it is very important to remember that pumping all your money into your home isn’t necessarily the best thing to do. It is always worth having an emergency savings fund or buffer that you can call on if you need money.
Opting to increase your payments by moving to capital repayment isn’t a decision to be taken lightly. For a start, you may not be able to switch back again down the line and you’ll certainly find it very difficult to release any equity from your home in the near future, especially if you haven’t built up much equity.
Whether you are already on a capital repayment plan or would rather remain on an interest-only deal, there is another way to reduce your mortgage debt and increase your equity stake.
The majority of lenders allow overpayments, typically up to 10% per year either in a lump sum or on a monthly basis. Others, like Northern Rock, allow you to make unlimited overpayments without penalty – although you will still be charged an early repayment fee if you pay off all your mortgage early.
Check with your lender to see how much you are allowed to overpay a year. Nationwide, for example, allows up to £500 per month.
Don’t forget that if you exceed your overpayment allowance you will be hit with an early repayment charge, typically around 2% to 3% of your outstanding balance.
Making overpayments is a flexible way to reduce your loan – you can either set up a standing order or, if you are very disciplined, make payments when you can afford to.
Remember that while overpaying is ultimately a good thing, you should pour all your money into your mortgage.
4. Tracker savings
If you are on a tracker mortgage then you will have seen your monthly payments decrease over the past few months in-line with Bank of England base rate cuts. Your lender will automatically reduce the amount of money you have to pay it each month – but rather than let this money languish in your current account or get frittered away, it is worth considering putting it back into your mortgage.
This will count as an overpayment (see above) so check with your lender to see how much you are allowed to increase your monthly payments by.
Also, if you have more expensive debt elsewhere (for example, on a credit card or personal loan) then it might be more worthwhile using the savings from your tracker to pay this off first, as the interest rate is likely to be higher. Some historical forms of credit might not allow you to repay the debt early, however, so bear this in mind before taking action.
You could also use the money you are saving to build up a savings buffer, by putting the money in an ISA or a savings account.
Improving your property (by converting the loft into extra bedrooms, for example) can increase the value, which could help you get a cheaper mortgage when it comes time to find a new deal.
However, David Hollingworth, mortgage expert at London & Country, warns this is a risky game. “There is no way to qualify what the added value would be, especially in the current market,” he says. “You should only take this route for the right reasons – i.e. increasing the size of your home.”
Boulger agrees: “While this could work, you should never renovate purely to get a better remortgage offer.”
For a start, borrowing money from your existing mortgage lender to do the building work could be counter-productive.
If you do have the money and were planning to renovate anyhow, then make sure you let your lender or mortgage broker know that the work has been done when it comes to remortgaging, as it could help you get a better deal.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
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.