We’ve all heard about the credit crunch and the collapse of Northern Rock, but for homebuyers and remortgagers alike, the reality is a changed mortgage market.
As lenders, forced to borrow money at a higher rate, have pushed up their mortgage rates, life has become tougher for borrowers.
While some lenders have simply tightened their criteria to attract the safest customers in a declining market, it’s the now you-see-it, now-you-don’t aspect that is most frustrating.
According to financial information service Moneyfacts, the number of mortgage products to choose from has dropped by 20 per cent in only a week.
Some are replaceable, such as the Co-op’s two-year deals that have just done the disappearing act, but, for those without a deposit the death knell rang earlier this week when the Abbey became the last to withdraw their 100 per cent mortgage deal.
And, perhaps most dramatically, others, including Bath, Earl Shilton, and even First Direct, who have been swamped with applications, have temporarily withdrawn entire product ranges.
While it’s true that the number of mortgages approved for house purchase fell in February to a 13 year low, over a million existing homeowners, including the swathe of Northern Rock Customers, will be looking to remortgage this year.
Yesterday's base rate cut will, alas, have only a limited impact on the current state of affairs because the rate at which banks lend to each other remains stubbornly high. So what's a borrower to do? We asked three experts to explain what's going on, and how to survive in the new market.
What The Brokers Say
1. The Situation:
David Hollingworth from London and Country says:
"People are getting to the point of panic. But there are people still lending money - we’re extremely busy. It’s not a case of people being turned down left right and centre.
"But re-pricing is continual. Products are changing hour by hour, and an agreement in principle, or a quote doesn’t guarantee you a rate. It’s not until you’ve got your application in and paid the fees, that you know you’ve secured the rate."
Melanie Bien from Savills Private Finance says:
"A lot of people are panicking, but there’s no need because there are lots of deals available, though it is tougher across the board.
"Even after the recent rate reductions rmortgage rates are still edging upwards, and there are just fewer mortgage around. Whereas before a lender might offer five or six products now they may have two or three.
"Borrowers who are in the strongest position will have a low loan to value and clean credit history, and multiples are likely to be a maximum of four times income now."
Katie Tucker from Charcol says:
"It’s got to get better soon. I’m hoping that between five and £15 billion may be dropped into funding for lenders and they will be able to offer better rates.
"In six months time either it will be better, or it will be so bad that government will have pumped in the funding. If you’re not remortgaging until this time next year it won’t be this bad, but it won’t be as easy as it was two years ago."
2. What can borrowers do?
David Hollingworth says: "To get the best rates you’ll need a lower LTV (loan to value), say 75 per cent. Those who have already borrowed at a high LTV may find life tougher, so it would be a good idea for them to start making plans to overpay."
Melanie Bien says: "A lot of lenders are looking at affordability rather than strict multiples so if you’ve got big bank loans and lots on credit cards it may be worth trying to clear the debt first. Lenders are looking for low risk borrowers and your credit rating will affect your chances.
"Get organised early. We used to advise people to start looking 120 days before, now we say 180 because you can reserve a rate for up to six months.
"You’ll have to have a valuation done and you might have to pay a non-refundable fee of around £100. In six months if the rate you’ve reserved is competitive you can go ahead. If not you can apply for the best deal available at the time."
Katie Tucker says:
"If you’re current product is finishing don’t go on to the standard variable rate and sit it out. The SVR is about 7.25 per cent so if you’re on 4.5 – 5 per cent holding out for a couple of months will cost you a fair chunk.
"And use a good mortgage broker. Go and see a broker that deals with the whole market, preferable one that doesn’t charge a fee."
3. What’s should I go for?
David Hollingworth says:
"It has been bad news for people wanting 100 per cent mortgages, but for those who can have help from parents there are still niche products, such as from Bristol and West or the Bank of Ireland.
"For a more standard borrower, if you’re buying a new home and you have a 25 per cent deposit you can still get 5.62 per cent on a two- year fixed. It has a fee of £999 (from the Halifax).
Melanie Bien says:
"The mortgage you should choose depends, as usual, on your situation. If you need certainty go for a fixed-rate, but otherwise, because we do expect further reductions, a tracker might be better."
Katie Tucker says:
"HSBC are offering to match people’s fixed-rate deals for two years. But be careful because they are still cherry picking.
"You have to put down a minimum of 20 per cent and the maximum loan is £250,000. And they’re funding it through an arrangement fee that goes up to over £4,000."
Ray Boulger of Charcol adds: "All borrowers with an existing bank rate tracker mortgage will see the full benefit of yesterday's cut, but borrowers taking a new tracker mortgage today will still be paying more than the initial rate new borrowers on a tracker mortgage paid when Bank Rate was at its recent peak of 5.75 per cent last summer.
"This is because lenders' tracker margins have on average increased over this period by about 1.25 per cent.
"Fixed rates have not been hit as hard as variable rates and as a result we have seen an increase in the proportion of clients choosing a fixed rate.
"Lenders have continued to increase tracker rates much faster than fixed rates because of the large Bank Rate/Libor spread, currently 0.68 per cent.
"If Bank Rate falls below 4.75 per cent tracker rates will generally offer better value, but many clients prefer the certainty of budgeting a fixed rate provides."
Credit Rating Tips
A poor credit rating could stop you getting the mortgage you want, and the credit report company Experian is already experiencing an increase in the numbers of people checking their own credit report.
Experian offers the following tips for a healthy credit rating:
1. Make sure you're registered on the electoral roll at your current address - not being registered could put a dent in your credit score
2. Make sure past debts and arrears are paid off and add a note to your credit report if you got into difficulties for a good reason
3. Close cards and other accounts you no longer use - lenders may take account of any available credit even if you are not using it
4. Check your financial associations (people you are linked to on your credit report) and query any associations that no longer apply
5. Query any unnecessary credit searches (quotation, enquiry and ID check searches do not affect your credit score)
Nikki Sheehan
