If your mortgage deal is up for renewal over the summer, start planning now to avoid a nasty shock and you may be able to avoid paying thousands of pounds in extra interest.
In 2005-07, when the mortgage lending boom was in full swing, most mortgage lenders relaxed their lending criteria.
Now those same lenders are tightening them. That means many people who qualified for attractive low-interest deals won’t qualify for a top-rate deal when their current arrangement ends.
They will be re-designated as sub-prime borrowers who are only eligible for loans at higher rates. But there are some escape routes from the sub-prime ghetto – see below.
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Less credit for less-than-perfect credit histories
Moneyfacts recently calculated that whereas in March 2007 there were a staggering 6,500 mortgage offers available to sub-prime borrowers, there are now less than 1,900, while the number of sub-prime lenders has shrunk from 32 to 20.
Say that back in 2005 you secured a three-year fixed-rate loan at 4.5% on a 95% Loan-To-Value ratio. At that time the lender was happy to lend four-and-a-half times salary. Now they’re not, and their best deals are only offered on 80% LTV or below.
That means when your current deal expires they’ll probably offer you their Standard Variable Rate, at a current rate of 7.00%. On a £100,000 mortgage that means a leap in repayments from £556 to £706 per month.
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Escape route #1: Get an offset mortgage
One possible escape route for people in a similar situation is to reduce the mortgage by using all their savings to pay some of the loan off when re-mortgaging. This will not only reduce the LTV ratio - making you a more appealing prospect to other lenders - but also shows evidence of your commitment, which gives a lender more confidence.
Like many people, you may have thousands tucked way in your rainy day savings account but be, rightly, reluctant to committing this cash to paying off part of the mortgage. So why not have your cake and eat it?
Consider an offset mortgage, where your savings are held in an account with the lender and earn no interest, while the mortgage loan on which you pay interest is reduced by the amount in the savings account. You still have access to those savings, but while you’re not actually using the money it effectively earns you interest at the same rate as you pay on the mortgage.
Offset mortgages used to be a niche market but are now mainstream and many lenders are competing actively in this market, making it more likely that you can find a good introductory deal.
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Escape route #2: Give them the facts
In the mortgage boom years, many lenders and mortgage brokers encouraged people to go for ‘self certification’.
This means you declared your income but provided no evidence to support the figures. Brokers and lenders knew people overstated their incomes to qualify for loans. Now self-cert means paying a higher interest rate.
So if you did self-cert last time around, check if you would qualify on a normal basis, providing full evidence of your earnings. Obviously you cannot go to your existing lender and admit you told a lot of porkies last time (technically that is fraud), but you can ask a mortgage broker to check out what kind of deal you would get on the basis of disclosing the true figures.
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Escape route #3: Get a new valuation
Many people who last re-mortgaged two or three years ago have got another escape route. The value of your property ought to be higher now - and perhaps you are lucky and live in an area where it’s gone up by more than the national average.
Your current lender won’t normally assume any increase in the value of the property, but a new lender will take the current market value into account. If this reduces the LTV below 85% or 80%, it could mean you qualify for a better mortgage offer.
To check this out, get a local estate agent (or two) to give you an informal valuation- but make sure you don’t get pitched with an inflated value to win your business. Make it clear you want a valuation at which the agent is confident you would sell within a couple of months. That shouldn’t be too far removed from the independent valuation a new lender will ask for.
If the new valuation takes you well clear of the 85% LTV threshold, you may well qualify for a better-value mortgage.
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Escape route #4: Negotiate now
Most borrowers leave it too late to negotiate. You need to start the process at least three or four months before your current deal ends. Start by talking to your current lender and ask them to give you an indication of the terms they will offer when the current term expires.
Unless they come up with a stonkingly good offer, tell them you’re considering re-mortgaging with another lender.
Remember, new mortgage lending is way down at present, so lenders want to hold onto existing business if they can. So they may grudgingly come up with an acceptable deal. And if they don’t, at least you have a base line against which to judge other offers.
