Mortgage ‘timebomb’ raises fears of a new wave of repossessions

Published 26th May 2009

Tougher lending rules could force millions of homeowners on to standard variable rates, just as they are about to rise
Mortgage timebomb.


Millions of homeowners with mortgage deals that expire over the next year are in for a nasty surprise as tighter lending criteria mean that they may struggle to remortgage, experts have warned.

With hundreds of thousands of borrowers already stuck on standard variable rates (SVRs), fears are growing of a sharp rise in defaults and home repossessions when the Bank of England begins to increase the cost of borrowing as the economy recovers. Economists forecast that interest rates will rise as early as next year; any increase is likely to be passed on quickly by lenders in the form of higher SVRs.

Melanie Bien, director of Savills Private Finance, the mortgage broker, says: “This situation is a ticking timebomb. While interest rates are low, borrowers will be fine to sit on SVRs but once rates start to rise, which we expect to happen next year, payments could become unaffordable and lead to repossession for those who can’t cope.”

A borrower with a £150,000 interest-only mortgage on the current average SVR of 4.61 per cent, is paying £576 a month. But if interest rates rise by 2 percentage points over the next 18 months, as some economists expect, monthly repayments will increase by £250, or £3,000 over the course of the year. A rise of 4 points, predicted by 2012, will lead to repayments soaring by £5,000 a year.

The chronic shortage of mortgage funding means that borrowers with even the slightest question mark over their financial or employment history are being rejected for new deals. Brokers say that the restrictions are unlikely to ease over the next year as banks continue to cherry-pick “prime” borrowers. However, there are 3.8 million homeowners who are known as “complex prime”, according to Mintel, the research company. This group includes those who have seen their wages cut, face redundancy, have moved frequently, are self-employed, or face high levels of debt.

A further one million borrowers are in negative equity, according to the Council of Mortgage Lenders (CML). These borrowers, who are trapped with a home loan that is worth more than the value of their property, will find it impossible to secure a new mortgage deal from most lenders. The CML says that a further 1.1 million homeowners have seen the loan-to-value ratio of their mortgage grow to above 90 per cent, dramatically reducing the number of deals available and pushing up the cost of remortgaging.

Mintel also estimates that another 1.3 million homeowners are considered “sub-prime” because they have missed mortgage payments or credit card bills, have been repossessed, or were given a county court judgment.

However, this group is set to double over the next 12 months as unemployment passes three million. At least half a million borrowers will be three months in arrears by the end of the year, according to the CML. Missed payments remain on credit reports for three years.

Mortgages for borrowers considered credit-impaired have vanished from the market in the past two years. At the peak of the housing boom, there were more than 7,000 mortgage deals for borrowers with less than perfect credit histories. Today figures from Moneyfacts.co.uk, the financial website, show there are only eight.

Another group of borrowers who will struggle to secure mortgage finance are those with a self-certification mortgage. About 45 per cent of mortgages were approved without a check on income in 2007, according to the Financial Services Authority (FSA), either because deals were self-certified, or fast-tracked by lenders. The FSA is set to severely restrict the deals, which became known as “liars’ loans” because of the potential for borrowers to inflate their earnings to borrow larger sums. In 2007 there were 816 deals available for borrowers who could not provide proof of income, compared with only 14 today. Borrowers who took out loans worth more than three times their income will struggle to remortgage under the more prudent lending criteria now in force.

Matt Andrews, of MoneyWorkout, the broker, says: “Without proving their income, families were allowed to stretch to a slightly larger property by securing a mortgage outside their income capability.

What you should do

Homeowners who will revert to an SVR this year, or have already done so, should consider how a rise in rates would affect their income. There are calculators available online at, for example, London & Country Mortgages (www.lcplc.co.uk).

If your deal expires soon and you are worried about your ability to lock into a fixed-rate deal, there are steps you can take.

Ms Bien says: “Anyone who thinks they will be in this position urgently needs to act. If you have a lot of credit card debt and other unsecured borrowing, you should pay this down to increase the amount you can borrow under a lender’s affordability criteria.”

Homeowners who fear that their chequered credit history will deter lenders from offering a new mortgage should check their credit file.

Experian, Equifax and CallCredit allow you to order a credit report via the post for £2, which will let you see your credit score — seen as crucial by lenders when deciding whether to extend credit in the future.

Missed credit card, loan or mortgage payments remain on your credit file for three years, while bankruptcy and county court judgments are visible for six years.

You can dispute any details on your report and ask the credit-reference agency to update your file if necessary.

It may help to add a statement to your credit file to explain a mark on your history which could be justified. However, it is not a good idea to add too many notes. James Jones, of Experian, says: “Your credit report is a factual representation of your current and previous financial situation, but there are things you can do to improve the picture it paints so it is worth checking your report before applying for credit.

“With unemployment rising and the economy worsening, households are seeing their credit histories hit, with a knock-on effect on their ability to secure a new mortgage deal. Missing a payment could make it difficult to get loans in the future.”

You should also look at the loan-to-value ratio of your mortgage. The average household over estimates the value of their property by £37,000, according to recent research by Abbey, the lender owned by Santander. Use websites such as Zoopla, or visit local estate agents to gauge the value of your home and work out what the loan-to-value ratio is of your mortgage.

Ms Bien says: “The easiest thing to do is to overpay to reduce your mortgage debt and loan-to-value ratio. If you have cheaper monthly payments as a result of falling interest rates, you should put this money towards the mortgage which will widen your options when you come to remortgage. Most lenders will let you overpay by up to 10 per cent of the mortgage amount per annum.”

You can get more detailed advice by speaking to an independent mortgage broker, such as London & Country Mortgages or Savills Private Finance. If you are concerned about your ability to remortgage when your current deal expires, contact your lender to discuss your options. It may be able to offer a deal to suit your circumstances.

Improve your chances

Reducing your level of unsecured debt will improve your chances of being accepted for a mortgage. Close credit card accounts that you do not use.

Check your credit. You can obtain a copy of your credit report from a credit-reference agency for £2, or sign up to monthly subscription services which provide a credit-scoring service.

Experts argue that overpaying on your mortgage will reduce your loan-to-value ratio and put you in a considerably better position when you come to remortgage.

Source: ' Times '

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