Homeowners with mortgages face a nasty few months, and if you don’t need to refinance until the autumn you can breathe a sigh of relief.
But if you do need to renew your loan soon, there is one sure way of ensuring that you qualify for a better deal.
The squeeze has seen the number of mortgage offers available on the market plummet by two-thirds from its peak last year, while dozens of small lenders have closed up shop.
But it’s the withdrawal of one of the largest mortgage lenders - Northern Rock - that is causing most problems. Rock has said it wants to keep under half of the borrowers who need to renew loans this year, which means it will be offering them only very unattractive terms on a new deal.
Mortgage rates have climbed despite rate cuts
Other lenders anticipate high potential demand for loans, but see no reason why they shouldn’t turn a profit. So - apart from HSBC – lenders are likely to offer rates only a little better than Rock’s and significantly worse than the best deals they have been offering in the market until now. Unless, that is, you have a clean credit record, satisfy their ‘affordability’ criteria and plan to borrow 80% or less of the value of your property.
Here is where you may have a ‘get-out-of-jail’ card. It’s the Loan-To-Value (LTV) threshold that is likely to cause most trouble for borrowers. Many big lenders now restrict their best offers to 80% LTV or below (75% with Nationwide). So the question you need to ask is whether you can scrape over this threshold. It’s worth serious money - at 90% LTV, a market-leading two-year rate is 6.5% whereas at 80% the rate is 5.6% - a difference of £900 a year on a £100,000 loan.
Moreover, arrangement fees on the best deals for higher LTVs are now typically £999 or even more. This means you have every incentive to opt for a five-year deal or even longer to avoid having to pay another fee in two years’ time. And that in turn means it’s even more important to secure the best possible deal now.
Compare tracker mortgage rates
Check the value
The first issue you face is that a new lender will not simply accept an old valuation as the basis for their offer.
They will want a new valuation. So you need to ascertain what that’s likely to be. Ask a couple of local agents to give you informal valuations on the basis that you’re thinking of selling, and tell them you want to be sure of a sale.
These valuations shouldn’t be too far away from what a mortgage lender will value your home at. In today’s climate, mortgage valuers will tend to price at 5% or so below local asking prices, so take this into account.
If the value of your home has risen to the extent that you need to borrow less than 80% LTV, then you’re free to shop the market. A mortgage broker should be able to secure you a reasonable deal. Get on the case at least three months before your current deal expires.
Find some cash
If the ratio is above 80%, then think about whether you can pay off a bit of the loan. You could use some rainy day savings or even cash in longer-term investments. This may seem drastic, but if paying £10,000 off the loan is going to cut the interest rate you pay by 1%, that is £1,000 a year on a £100,000 mortgage. By any standards that is a high return on your money, probably far higher than it is earning at the moment.
Paying off a bit of the loan not only helps you meet lenders’ criteria but is evidence of your commitment and earns you more brownie points, making it more likely you’ll secure a favourable deal.
If you don’t have the money in savings accounts or investments, where else could you get it? If you have an endowment policy that’s been running ten years or more, find out what you could get for cashing it in. Request a surrender value from the insurance company, but also get an independent valuation from one of the companies that buy such policies – often they will pay significantly more.
If it’s down to the wire – you need a couple of thousand pounds more to cut your loan to a size where you get a favourable deal - then there’s one final desperate measure to employ. Sign up for a 0%-for-12 months new-purchases credit card and put every possible item of spending onto the card for the next few months, allowing cash to build up in your bank account.
Use an offset loan
Another option to consider if you have cash available in a savings account is an offset mortgage. Here, you have a mortgage account and a savings account with the lender. The amount in the savings account is deducted from the amount of the loan you pay interest on.
The offset loan enables you to keep access to your savings while at the same time reducing mortgage repayments. It’s a flexible scheme that’s becoming steadily more popular, with several lenders offering competitive deals.
Don’t take on debt you can’t afford
All this assumes you can afford to make the repayments. But if you can’t - if the payments on your debts including loans, cards and mortgage is more than you can actually afford - then do not incur more debt to keep your mortgage going. In this situation, it’s best to disclose your problems to lenders and negotiate a revised payment schedule.
Buy some protection - if you’re employed, then it’s worth considering insurance to protect your repayments if you’re made redundant. With the economy definitely heading for a downturn that risk is greater than it has been for years. Many payment protection policies include both sickness and unemployment, but you can buy unemployment cover separately at a monthly cost of about £10 to protect £500 per month.
Hope for a rescue party
The banks have told the Bank of England, the Chancellor and the prime minister that the mortgage market has seized up and that only action by the authorities can unfreeze it. If the Bank of England does change its policy to accept mortgages as collateral from the banks, then securitisation of mortgages can start again, increasing lending capacity and easing the squeeze on homeowners.
As one manager put it to me recently, it’s simply unfair that the authorities are using current tight money policies, because they require mowing down millions of innocent borrowers in order to execute a guilty few.
That’s not a recipe for winning elections, so political pressure for a change of policy is bound to grow, and I am hopeful that within the next few months action will be taken to restore the mortgage market to something closer to normality.
