News - Guide to Mortgages

News... Guide to Mortgages

We look at the often confusing world of mortgages and remortgages to explain what options home owners could have available to them in the coming months

The FSA’s (Financial Services Authority) report estimates that 1.4 million homeowners will see their mortgage repayments rise by an average of £210 during 2008, as their low fixed-rate mortgages are due to come to an end. This, according to the Council of Mortgage Lenders, means that as many as 123 homes could be repossessed every day this year.

However, it’s not all doom and gloom for home owners. The Bank of England dropped its interest rates again in February – now down to 5.25 per cent – and there is wide speculation that this trend is set to continue.

We look at ways that home owners can prepare for the coming months or simply make better use of a range of mortgage offerings.

Start from the beginning…
The Council of Mortgage Lenders (CML) estimated that there would be a big increase in repossessions during 2007. However, the actual number was around ten per cent lower than estimated – which may be a sign that preparation is the key to overcoming financial struggles. For those of you who haven’t kept fully up to speed on the financial economy, don’t panic – it can be confusing to know what to do for the best.

Mortgages explained
There are so many different types of mortgages and rates available that talking your options through with a trained mortgage advisor would provide a great deal of help. However, doing your own background research is also a good idea. Below are some basic terms that you might want to find out about in more detail:

Standard Variable Rate (SVR) – Each lender has its own standard offering of interest rates that it usually applies at the end of a mortgage offer, such as a two-year fixed mortgage. However, the amount you pay on a SVR can change from one month to the next as the Bank of England changes its base rate. Lenders usually set their own SVR somewhere between 1.5-2 per cent above the base rate.

Fixed Rate – Fixed as a set rate for the number of years that you decide upon – usually between two and five years – however some home owners chose to fix their rates for 15 years or more! The benefit of a fixed rate is that you don’t have to worry when interest rates go up and you know how much you’ll be paying out each month. The downside is that you won’t benefit if and when interest rates fall.

Discounted Rate – Introduced as an incentive to persuade customers to choose one company over another, the rate is usually significantly lower than their SVR. However, the discounted rate will probably only last for two or three years, so it is wise to check that the lender also has a competitive SVR, otherwise your payments could increase by quite a lot when the discount ends.

Capped and Tracker – Again, these are usually only offered for a set period of time until it reverts to the lender’s SVR. The capped rate mortgage means you know what the maximum payment can be, safeguarding yourself against any unwelcome surprises. A tracker mortgage is very much like the SVR, however it shadows the Bank of England’s base rate much more closely.

Penalties – Some mortgage providers will charge you if you incur a missed payment during the term of your mortgage. Others will not look favourably on you for paying off your mortgage early or switching lenders and again may stamp a hefty penalty charge on this to deter you from doing so. Do not sign anything until you are completely clear on what you can and can’t do in the future.

Don’t bury your head in the sand
Those of you who are worried that you could face financial difficulties this year should start looking around for remortgage deals – especially as some remortgage packages currently offer free valuations and legal costs. The sooner you start doing your research the better, so you’re prepared for the worst – and if the worst doesn’t happen then that’s great! Don’t try and cope with increased payments if they’re out of your reach. The sooner you start looking around for a new mortgage the sooner you could start saving yourself money.

What are your options?
Don’t panic until you have a clear picture of all your options – and don’t expect all banks to simply throw you to the lions. This month, HSBC announced that its existing customers who are expected to see their fixed-rate loans mature by the end of April, estimated to be around 10,000 home owners, will be offered a remortgage at their current rate for a fee of around £500. Although this may seem like a lot of money, options like this are well worth the up-front fee as monthly mortgage repayments are expected to rise by £200 a month.

If however, your bank has made no such gesture, there are short-term solutions that can relieve high payments until you have managed to put a solution into place. Extending you mortgage term or opting for interest-only payments are not long-term solutions, but if the other option is falling into arrears then these are definitely the lesser evil – many first time-buyers these days are opting for 30 and even 35 year mortgages instead of the standard 25 years.

If however you’re looking for a long-term solution only, then the next option along is, of course, remortgaging.

Remortgaging – moving your mortgage without moving your home
Don’t think you’re alone if your faced with the prospect or remortgaging your home. Many UK home owners switch their mortgage lenders on a regular basis in order to save themselves money and get the best deal at that particular time. Some home owners rule out the option of remortgaging because they think it is complicated and confusing – but that doesn’t have to be the case and remortgages can even be approved online. A number of financial experts advise that homeowners change mortgage lenders as often as they change their car in order to get the best deal at all times!

The Consumers Association estimates that remortgaging could save the average SVR (Standard Variable Rate) mortgage holder around £400 a year. However, the fee for remortgaging can go into hundreds of pounds so it is important that you know what you’re doing. Find out what the lender’s Standard Variable Rate (SVR) is before you sign anything and make sure you’re fully informed of any penalties or additional fees and costs.

The best time to review you mortgage is when all introductory offers and special deals have ended and you start paying your lender’s SVR. When you’re paying the SVR, a lender will not usually charge you any redemption fees for taking your business elsewhere, so this is the ideal time to do it. However, remember that a number of lenders will expect you to have ten per cent equity in your home before they consider you as a remortgage customer.

Finally, when you’ve found a good deal from another lender, go back to your current lender and ask them if they will match it in order to keep your custom – it will save you the hassle of moving, and possibly some money too.

How to benefit from the latest interest rate cuts
According to Moneyfacts, an independent financial website, if you’re currently paying into a mortgage type that will see the benefits of the recent interest cuts – e.g. a tracker-mortgage – but you can still afford to continue paying the higher ‘pre-cut’ payments, then investing this money could result in around 15 months being taken off the term of the mortgage – which can add up to thousands of pounds.

You can make significant savings in the long run if you are able – or willing – to overpay on your mortgage each month. If you can afford to tighten your belt, even for a few months at a time and use the excess money to pay off your mortgage then give it a go. For example, if you have a £100,000 mortgage, which you have opted to pay back over 25 years at 6 per cent interest, you will be paying £93,290 in interest alone. However, if you overpay by just £100 a month then your mortgage term will be reduced to 18.6 years – reducing the overall interest you have to pay by £27,000!

Alternatively, if you can make lump-sum payments whenever you can – without being penalised by your lender for doing so – then this is a good investment for your money. For example, if you have unused savings sitting in a bank account or you receive a bonus from your employer, think about using this to reduce the percentage of loan to value of your home – plus many lenders will let you draw back the money if you need it.

Keep an eye out for very low fixed-rate mortgage deals if you’re thinking about remortgaging – as even more cuts are predicted in 2008, lenders will have to think ahead if they don’t want their fixed-rate deals to be priced out of the market. Finally, ask your lender if the interest rate cut has been taken into consideration at your bank – lenders may not tell you about their mortgage offers if you don’t ask.

So, if you’re having sleepless nights worrying about the future, start planning ahead now. Try searching each lender’s website to see what they are offering or use a comparison website to do it for you. There’s a lot of advice and help available and even those of you who are quite content with your mortgage payments might not be so when find out how much you too could be saving.