Don't be beaten by the mortgage mayhem

23 July 2009

The property boom bubble has long burst and taken down with it 100% mortgages and happy-go-lucky buy-to-let landlords. These have now been replaced by a housing market that has taken a severe battering and suffered grim repossession figures – a report from the Council of Mortgage Lenders shows that quarterly repossessions in Britain are up 50% in a year.

So what are the prospects for those trying to get onto the first rung of the property ladder, or homeowners in need of a new mortgage deal? It doesn’t have to be all snakes and ladders.

However, although the glut of property programmes and careless advice of past years has vanished, there are still a few snakes lurking, ready to knock you off the ladder.

So, whether you’re a first-time buyer or already a homeowner, here is our guide to help you find the best mortgage deal for you.

First-time buyers

There are now some attractions for first-time buyers. According to Halifax, the average house price is now £158,565, down from £183,694 a year ago, so if you’re looking to save a 25% deposit, you only have to get together £39,641, rather than £45,923.

Assuming an interest rate of 4.5%, your monthly payments would then be £718.07, rather than £831.87, based on a repayment mortgage over 40 years. 

Of course, buying your first home will not be without its hitches. Lenders are more cautious about lending these days, so you’ll need a larger deposit. “You’ll need to save at least 20% to get a decent rate on a mortgage,” says Nici Audhlam-Gardiner, mortgage director at Abbey and Alliance & Leicester.

According to, the best first-time buyer rates require a 20% deposit. But if you only save a 10% deposit, there are deals available, albeit at a higher cost.

If raising sufficient money is hard, Richard Campo, technical adviser at mortgage broker Alexander Hall, suggests you ask relatives to help. “A parent or grandparent can be a guarantor,” he says. “Or you could ask them to help with the deposit. Saving rates are low, so they could help you reduce your interest rate by increasing the deposit you can put down.”

Find out other ways parents can help their child onto the ladder

You could also consider buying with friends. Lenders will take into consideration up to four salaries on a mortgage and allow you to borrow as much as three times the total income. However, Campo recommends you make sure any agreement is legally watertight.

“Take legal advice, and ensure you all understand what would happen if someone wanted to move out,” he says. “Consider taking out insurance in case any of you lost your job or became ill and were unable to pay your share of the mortgage.”

Although first-time buyers have to cough up bigger deposits, some lenders offer first-timers special deals. “There aren’t so many around at the moment, but they will often give you better terms,” says Audhlam-Gardiner.

Campo advises opting for a fixed-rate deal for your first home. “Many first-time buyers have to stretch themselves, so it’s important to make sure you can afford your mortgage. The certainty of fixed repayments can be very useful,” he says.

“If you’re still at home or renting, you’ve got a lot more flexibility than if you had to sell somewhere first. So be bold when you make an offer. A friend of mine recently bought his first home for £300,000 – the asking price was £400,000.”

How to haggle down house prices

Homeowner options

But what if you already have a place of your own? If you have sufficient equity in your home, remortgaging may be an option, if your discount period is coming to an end. With the Bank of England base rate falling from 5% in April 2008 to 0.50% this March, and remaining unchanged since then, remortgaging is certainly a money-saver.

But as property prices have fallen and lenders become more cautious, you’ll face some challenges if you’re looking for a better deal.

“It all hinges on the level of equity in your property,” says David Hollingworth, mortgage specialist for broker London & Country. “You can get deals at 95% loan-to-value (LTV), but the rates get better the more equity you have.”

So having sufficient equity is crucial. Hollingworth recommends being realistic when estimating the value of your home: “Valuers are being pretty conservative at the moment, so check out the local market and speak to estate agents.”

If you’re not sure about the value of your property, another option is a deal with a free valuation. Providing there are no upfront booking fees, if you find your home isn’t worth what you thought, there’s no charge if you later back out of the deal.

Speak to your current lender if you suspect you’re in negative equity or need a high LTV.

Find out how you can escape the negative equity trap

Melanie Bien, spokesperson for independent mortgage broker Savills Private Finance, says: “You may find your current lender will do you a deal”

You should also look at your overall financial situation if you 
don’t have sufficient equity to get one of the best deals. With interest rates low on savings, you might be better off using some cash to pay 
off part of your mortgage to increase 
the equity.

Fixed rates

As well as focusing on the amount of equity in your home, you’ll also need to decide whether to go for a fixed deal, a tracker or a discount. While your own personal preferences will come into play, the certainty of fixed rates means they have the upper hand in the current market.

According to the Council of Mortgage Lenders, 56% of new loans were fixed rate in February, up from 49% the previous month.

“Fixed rates buy protection from an increase in the Bank of England base rate,” says Ray Boulger, senior technical manager at John Charcol. “We don’t know where the base rate might go over the next few years.” He adds that while it’s possible the base rate could stay low for the next two or three years, as the government tries to sort out the economic mess, it’s not inconceivable either that it could go up quickly to counter inflation.

Given all the uncertainty about where the base rate is heading, Melanie Bien favours longer-term fixes: “It may be worth fixing for five rather than two years, as rates on longer fixes are historically cheaper. If you fix for two years, you may be coming to the end of your deal just as interest rates are rising, and this could be expensive.”

Tracker mortgages

Trackers are viewed less favourably. While these were great when they were a percentage point or less above the Bank of England base rate that they track, the margins now are much wider.

“Trackers look cheap at the moment, but some of them are three or four percentage points above base rate,” says Bien. “This is fine when the base rate is 0.5%, but not so attractive if it returns to its historic average of around 5%.”

As well as the wide margins, Boulger says that a further downside of the trackers currently available is the early repayment charges: “Many of them tie you into exit charges, so you could miss the opportunity to fix when rates start to climb again.”

Discount deals

Discounts are an option, although, like trackers, they won’t give any protection if rates climb rapidly, and they often come with early repayment charges. But the rate you’ll pay now is cheap.

You should check whether you’ll be hammered with any early repayment charges on your existing product. “Even if you’ve got an early redemption penalty, it could be worth switching,” says Hollingworth. “If the new deal has a much lower interest rate, you could save enough to cover the penalty.”

There’s also an argument for moving onto your lender’s standard variable rate. Boulger says: “If there’s no real risk of your LTV exceeding 75%, you can afford to wait for more deals to come up. As the market picks up, the margin the lenders charge above base rate will decrease.”

Many standard variable rates are low at the moment. But, if you do decide to stay put, Boulger advises that you keep a close eye on the market. “Fixed rates will start to shift before the base rate, so check the deals regularly,” he says. “Or get a broker to do this for you, as they review the market on a daily basis.”

Top five tips for 
first-time buyers

1. Save as big a deposit as you can, aiming for around 15%.

2. Try to clear any other debts you might have – they can severely restrict the amount you can borrow, and raise the interest rate.

3. Shop around for the best deal – interest rates can vary by over 2.5% between the best and worst deals.

4. Do your sums beforehand and allow for fees such as stamp duty, solicitor’s fees and the lender’s arrangement fee.

5. Don’t cut corners on the survey, especially if you are buying a period property or converted flat. Paying for a more detailed report or building survey could save you money in the long run.

Source: London & Country

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