Last chance for a decent mortgage?

Published 06th Jul 2010

Mortgages could become harder to obtain, so it might pay to act now.


Homeowners should consider their mortgage arrangements amid fears of a second credit crunch that would see banks further restricting lending to customers.

The Bank of England said last week that mortgages would become harder to find because banks were struggling to raise money in the wholesale mortgage markets. Tighter banking regulation and fears of a double-dip recession could make this position worse, experts said.

Melanie Bien, at mortgage brokers Private Finance, said those who were thinking about remortgaging in the next few months should consider talking to a broker now. "It has been getting easier to get a mortgage," she said. "There have been lower rates available for those with smaller deposits, so this will come as a bit of a shock."

However, she added that it was crucial for people not to panic. "See a broker and take steps to make sure you're in the best position possible to get a mortgage," she said.

There are plenty of home loans available to those with a large deposit. If you have a deposit or equity in your home of 25pc or more, it is possible to get a fixed-rate mortgage at less than 5pc for 10 years and less than 3pc for two years. If you're happy with a variable or tracker rate you could get a mortgage at 2.29pc for two years. See the table (right) for some of the most attractive fixed-rate mortgage deals.

However, Hannah-Mercedes Skenfield at Moneysupermarket.com, the comparison website, said customers should take into account the fees and charges associated with these mortgages when working out whether they would be better off. "Make sure you do the maths," she said. "When you go through a proper comparison you might find that what appears to be cheapest actually isn't."

Home owners are struggling to predict what will happen to interest rates, in order to work out whether to go for a fixed or variable-rate mortgage. At present, many are on their lenders' standard variable rates, enjoying paying as little as 2.5pc on their borrowings. However, there are fears that mortgage rates could rise soon. Ms Bien warned that the best fixed rates might not stay on the market for long.

"If you need certainty, then fixed rates are what you should be looking at," she said. However, for those on the lowest variable rates, Bank Rate would have to rise by 2 percentage points for your mortgage payments to be more per month than on one of the most competitive fixed-rate mortgages.

For example, her calculations show that on an average £150,000 mortgage you would pay £313 a month on Nationwide's standard variable rate of 2.5pc.

If you opted for certainty and changed your mortgage to a five-year fixed rate of 4.19pc with Co-operative Bank, you would pay £524 a month. Mortgage rates would have to rise to 4.5pc before you would pay more on the Nationwide rate at £563 a month. You would also have to pay a fee for the Co-op deal.

Mark Harris of Savills Private Finance said: "As a rule of thumb, I would say fixing for five years at 4pc looks great value but two-year fixes at 2.79pc are maybe not so great. Remember that fixed fees work better on large loans, percentage fees are better on smaller loans. Clearly, fees on a five-year fixed rate work out cheaper on an annualised basis.

"I would still opt for a tracker but something reasonably flexible, ensuring that you can jump off if we see a sudden spike in interest rates. If you need certainty then trying to guess interest rates is a dangerous game and you should fix."

Ms Bien said those considering a fixed-rate mortgage should look at five-year deals rather than the alternatives. "Two years is not long enough, as you will have to remortgage again while rates are high," she said. She added that 10-year deals were too long for many people, as if you move or no longer need the mortgage you may face high penalties to exit it.

Customers who do need a new mortgage on their existing property, or who are looking at buying a house, should do everything they can to ensure they are looked on favourably by mortgage companies. This includes ensuring that they are on the electoral roll in their current property and that they have a good credit history.

"This may involve getting your first credit card if you are a first-time buyer," said Ms Skenfield. It is also possible to get a copy of your credit file to check whether there are any mistakes. You should also make sure you have saved as hard as possible for your deposit.

"If you've got money earning little interest in a savings account you may be better off using it to boost the equity in your home," said Ms Bien. She said many people with 10pc deposits were being turned down for mortgages, as lenders are far more worried about creditworthiness when a borrower has a small deposit.

"If you have major problems on your credit file, you may have to wait before you apply for a mortgage," she added.

Ms Skenfield said people should not rush into buying a home. "Lots of people worry that they have to buy a house by a certain age," she added. "That is not a good way of thinking about buying."

Source: ' Telegraph '

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