A Guide to Remortgaging in the Current Economic Climate

By April 15, 2009Mortgage

Remortgaging in the current economic climate is no easy task: in fact, recent figures disclosed by the Council of Mortgage Lenders have shown that the number of mortgages granted for 2008 – 516,000 – was the lowest figure since 1974; a 49% decrease on the previous year.

With the economic crisis deepening further still and expected to get worse throughout 2009, lending criteria will become stricter and more homeowners will find it tougher still to remortgage. With major lenders experiencing financial problems of their own and the rapid decline in house prices, obtaining a good mortgage deal is more difficult than ever – especially for those in negative equity or those with adverse credit histories.

To try and breathe life into the housing market and get it moving, the Bank of England has cut the base rate of interest four times since October: the latest in March saw the base rate fall to an all-time low of 0.5%, with further cuts predicted before the end of 2009. This has meant good news for those with tracker mortgages, some first-time buyers and some re-mortgagors, but many homeowners have not benefited, for various reasons.

Some lenders have not passed interest-rate cuts onto customers (some tracker mortgages impose a collar, which means the interest rate cannot fall below a certain point) and competitive mortgage products are often withheld from those with high LTV (loan to value) mortgages: this refers to the amount of mortgage versus the value of the home, and many people have found themselves with a high LTV as a result of the slump in the housing market.

Even though lenders are able to pass interest cuts onto customers, few are doing so: only a handful have reduced their standard variable rate accordingly. So, for people wishing to remortgage at this time, finding a good deal is harder than ever. Here to help is a brief guide to the different popular types of mortgage and the pros and cons of each:

Tracker Mortgage: a tracker mortgage is linked to the Bank of England interest rate and thus, not surprisingly, this type of mortgage is very popular at the moment. In respect of this, a tracker mortgage is a more attractive option at the moment than the discount mortgage, given that these types of mortgage follow the BOE base rate rather than a lender’s SVR. The table below shows the best tracker mortgage deals on the market at present:

Lender

Rate/Duration

Subsequent Rate

Overall Cost for Comparison

Total Monthly Cost

Early Repayment Penalties

Alliance & Leicester

3.04% for 2 years

5.34% for 276 months

5.3% APR

£855.21

2 years

Alliance & Leicester

3.24% for 2 years

5.34% for 276 months

5.3% APR

£870.94

2 years

Nationwide

3.48% for 3 years

3.5% for 264 months

3.7% APR

£789.09

3 years

Nationwide

3.58% for 2 years

3.5% for 276 months

3.7% APR

£816.24

2 years

Abbey

3.59% for 3 years

4.94% for 264 months

4.8% APR

£796.57

3 years

Please note that the above calculations are based on a loan of £150,000 with a LTV of 60% and a mortgage term of 25 years, and the type of mortgage you may be offered is subject to your personal circumstances.

If you are interested in switching to a tracker mortgage, try and find one with no redemption penalties (although these are few and far between at present!): this way, if interest rates start to increase you can switch to a fixed rate mortgage.

Fixed rate mortgages have always been very popular as they allow people to budget long-term: whatever payments are set at, they remain at that amount for a determined period, usually 2 or 3 years. The following table shows the best fixed rates on the market at the moment, based on the criteria above, but remember any deal you may get is dependent on your personal financial circumstances:

Lender

Initial Rate/Duration

Subsequent Rate

Overall Cost for Comparison

Total Monthly Cost

Early Repayment Charges

Woolwich

2.29% until 30/04/2010

3.29% for 286 months

3.3% APR

£755.23

30/04/2012

Alliance & Leicester

3.19% until 30/04/2011

5.34% for 274 months

5.3% APR

£856.28

30/04/2011

Clydesdale

3.69% until 30/04/2011

4.99% for 274 months

5.1% APR

£858.60

30/04/2011

Royal Bank of Scotland

3.89% until 31/03/2011

4.19% for 275 months

4.4% APR

£840.38

31/03/2011

Woolwich

3.89% until 30/04/2011

2.49% for 274 months

2.9% APR

£836.14

30/04/2012

The key when remortgaging is to be prepared: start looking for a new deal a few months before your current deal ends, in order to spot the best deals in advance. This is worth doing, as most deals are valid for 3-4 months; some are even available for 6 months.

Make sure you take into account all upfront fees involved in remortgaging (such as valuation and arrangement fees) and redemption penalties, so that you can be sure remortgaging is going to be profitable in the long term. Consider approaching your current lender to see what they can offer you; if they offer you a good deal, you will save hundreds in upfront fees and be spared the hassle of switching providers.

If, for some reason, you cannot remortgage and find yourself on a standard variable rate, don’t panic: at the moment, rates are very low and so the move should not affect you too much. Also, there is no tie-in period with the SVR, thus in a few months you may be in a position to secure a better remortgage deal.

Finally, navigating the remortgage market can be very daunting: if you are having problems finding the perfect remortgage to suit your personal circumstances, enlist the help of a mortgage broker.

As Robert Sinclair, Director of the Association of Mortgage Intermediaries (AMI), says;

“Even with a more restricted range of lenders and mortgage products, the issues and pitfalls facing people are well set out.  The need for help from a mortgage intermediary who can explain the various issues and then recommend the most appropriate product has never been greater. This is where a mortgage intermediary’s knowledge of the market has its greatest value”