Make the most of today’s mortgage market

It’s no secret that it is harder to get a mortgage than it was, say, 18 months ago. Fears of losses amongst banks and other financial institutions, partly due to the ‘relaxed’ lending of recent years has caused them to tighten their lending criteria - and that means fewer mortgages on the market.

That said, it’s by no means impossible to get a mortgage - in many cases, it can just take a little more searching to find a suitable deal. And due to many lenders recently cutting rates, buying a home in the present market can be a good financial move.

First-time buyers

In many respects, first-time buyers are the ‘winners’ in the current mortgage market. Providing they are offered a mortgage, first-time buyers are faced with lower house prices, lower interest rates, more sellers than usual, and because they don’t have an existing property to sell, the sale can often go through much more quickly than sales by existing homeowners.

Some first-time buyers are hesitant to enter the mortgage market, knowing that their home is likely to lose value from the beginning. While this is quite often the case at the moment, it is not necessarily a reason to stay away from the market.

Most lenders currently require a 15-20% deposit for their most basic mortgage deals. Very few analysts predict an equivalent drop in house prices, so it’s unlikely that new buyers will fall into negative equity in the near future.

Even if new homebuyers do fall into negative equity initially, this will only a significant issue if they are looking to sell their home or remortgage in the short term.

Existing homeowners

Existing homeowners potentially face a slightly more difficult situation when trying to remortgage, especially if they have fallen into negative equity.

If a homeowner is in negative equity, it can be difficult to move house or remortgage. Since selling their home will not cover the existing mortgage, homeowners must make up the difference, whether in a lump sum or instalments. Homeowners who choose to stay put while in negative equity will have to pay their lender’s standard variable rate (SVR) at the end of any fixed term deals.

Providing current homeowners have avoided this situation, they should be able to benefit in much the same way as first-time buyers. In particular, the lower interest rates will mean that homeowners who remortgage are likely to enjoy much lower monthly mortgage payments.

Get mortgage advice

Above all, good mortgage advice is essential to getting the most out of the mortgage market.

With lenders more cautious about their lending, the best deals can often be difficult to find. By speaking to an expert mortgage adviser, you will benefit from the knowledge of someone with experience in the mortgage market, as well as cutting out the long hours you could spend searching for the best deals yourself.

Secured loan or remortgage?

If you have enough equity in your home, you may be able to turn some of it into cash with a secured loan or remortgage. In case you’re not familiar with the term ‘equity’…

Equity equals

the value of a property minus

the amount owed on it (mortgage / secured loans)

So equity is the portion of the home that you owe nothing on. Let’s say Mr Evans has a £50,000 mortgage on his £150,000 house. On a repayment mortgage, that means he has £100,000 of equity – basically, he owns 2/3 of the house and is (gradually) buying the other 1/3 from his mortgage provider.

What are secured loans and remortgages?

Secured loans and remortgages are two ways people can turn their equity into cash.

People can also remortgage:

· to get a better mortgage deal,

· to speed up / slow down the rate at which they’re repaying their mortgage, or

· because they’ve reached the end of their mortgage term.

… but in this article we’re looking at remortgages designed to free up equity.

Secured loans and remortgages both involve borrowing money from a lender and securing it against your property. On the plus side, this means you’ll probably be offered a much lower interest rate than you’d be offered on an unsecured loan.

However, your home could be at risk if you don’t keep up with your repayments, as the reason why lenders can offer you a lower rate is because they’re taking a lesser risk with their money – they’d have the option of repossessing your home if there was no other way you could pay them back.

Secured loans and remortgages – what’s the difference?

In our example, Mr Evans could free up a reasonable amount of his equity (for home improvements, debt consolidation, etc.) with either a remortgage or a secured loan. Let’s say he wants to take out £50,000.

Remortgages

A remortgage would be a replacement for his mortgage. It’s a new, larger mortgage – big enough to replace his current mortgage and free up some of his equity, turning it into cash.

• He could take out a £100,000 mortgage, so he could pay off his £50,000 mortgage and have £50,000 left over.
• He’d then need to repay that £100,000 mortgage. Compared with his old £50,000 mortgage, repaying this £100,000 mortgage would either cost him more per month, take longer, or both.

Secured loans

A secured loan would be in addition to his mortgage. It’s a loan – a bit like an unsecured loan, but secured against the equity in his property.

• He could take out a £50,000 secured loan.
• He’d then need to keep repaying his £50,000 mortgage (exactly as he used to) and start repaying that £50,000 secured loan.

Secured loans and remortgages – what’s the risk?

Be aware that secured loans and remortgages have their ‘cons’ as well as their ‘pros’.

First of all, as mentioned earlier, you’re potentially putting your property at risk if you can’t keep up with the repayments.

Plus, property prices are falling at the moment. Mr Evans’ £150,000 house could be worth £140,000 three years from now, or £130,000 – or £170,000! There are lots of different predictions, but no-one knows for sure.

So the more equity he takes out, the greater his chances of ending up in negative equity (owing more on the house than it’s actually worth) if the value of his house drops further.

Falling prices are one reason lenders are more cautious about giving out mortgages today (especially mortgages that are worth nearly as much as the property). Like any secured debt, a mortgage needs to be secured against something that’s worth at least as much the mortgage – otherwise, it’s not really ‘secured’!

Secured loans and remortgages – the right way forward?

For some people, a secured loan or remortgage can be a great way to get their hands on some ‘liquid’ cash. For others, it might be a bad idea – if they don’t have much equity in their home, for example, or if they’re not sure they’ll be able to afford the repayments.

Even if you find a lender who’s prepared to give you a secured loan or remortgage, that doesn’t necessarily mean it’s a good idea. Before you commit yourself to anything, you should discuss your options with an expert who understands the secured loan and remortgage markets, and can help you decide which – if either – of the two is the right one for you.

The Bank of England Base Rate: How are mortgages affected?

The Bank of England’s base rate is a very important figure at the heart of the UK economy. It determines how expensive it is for banks to lend and borrow money, and it influences interest rates on consumer loans and saving accounts.

With the current economic situation looking uncertain, there has been much talk about which way the base rate will go. On the one hand, the Bank of England recently dropped the base rate to encourage mortgage lenders to offer cheaper deals and reignite demand for mortgages.

Read the rest of the article here

Remortgaging in a credit crunch

In the midst of the credit crunch, remortgaging can be a stressful experience for homeowners. The best interest rates are often only available if you are willing to pay a mortgage arrangement fee - and those on variable-rate mortgages can soon find their mortgage payments getting more expensive than they may have expected.

Lenders are being careful with their lending these days, but they are still being competitive. With that in mind, it makes sense to look around and ensure you are getting the very best deal on your remortgage.

Plan ahead

It’s essential you don’t leave your remortgage too late - any less than a month’s planning could leave you pressed for time. Ideally you should leave at least 2-3 months to go over your options, which gives you enough time to look at what’s available without rushing.

Find out all the costs involved

As with a new mortgage, there are many costs associated with remortgaging - so make sure you know exactly how much you are going to need.

Consider the mortgage arrangement fees associated with each deal. Many variable-rate mortgages come without an arrangement fee, but most fixed-rate mortgages do carry them. If you’re willing to pay an arrangement fee, a fixed rate is probably worthwhile, since it gives peace of mind over how much you will pay each month, and can usually be added to your mortgage payments. However, if interest rates go down, you may end up paying more than you would with a variable-rate mortgage.

You will also need to consider any ‘additional’ services offered with your mortgage, particularly PPI (Payment Protection Insurance). If you can afford to pay the extra each month, PPI is worth having - if something occurs that prevents you repaying your mortgage, the insurance should cover your costs, often for over a year. If it’s going to be a burden on your finances, though, it may be worth waiting until you are in a better position financially.

Make sure you’re safe if your payments go up

This doesn’t apply to fixed-rate mortgages, since the payments are the same each month - but there is a risk with variable-rate mortgages that if the interest rate rises, so will your mortgage payments. Make sure you have room in your finances for any unexpected rises, and expect your disposable income to take a hit if they do.

Some lenders offer a ‘cap’ on their variable rates, which could help you plan for the worst-case scenario (i.e. rates are as high as they can go).

Check for early repayment charges

If you are hoping to pay off your mortgage early, some lenders will ask for an ‘early repayment charge’ (also known as a ‘redemption penalty’. The idea behind this is that it makes up for what the lender would have gained in interest, had you continued with the mortgage as normal. However, these most commonly apply during fixed rate or discounted rate periods and many lenders offer deals which don’t include such charges.

Avoid mortgages with annual interest

Some mortgages work out their interest on an annual basis, meaning the amount of interest you pay every month is based on the money you owe at the start of each year.

Mortgages with daily interest charge you interest depending on how much you owe at any given time, so as you pay off more of the mortgage, the interest decreases with it. This might not make a huge difference at the time, but over the course of your whole mortgage, you will end up paying a lot less in interest - and the mortgage can technically be paid off years earlier.

This article was written by Melanie Taylor, a remortgage expert at Think Money