Beat falling house prices

9 January 2009
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.

3. Overpayments

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.

5. Renovate

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.

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