In this blog post we discuss re-mortgaging. Read on for our tips and advice.
Our guide to re-mortgaging your home
In a climate of increasing gloom about the long term prospects for the economy in general, and the housing market in particular, there is another element to factor into the equation.
The housing boom of recent years in the UK has in large part been funded by the availability of cheap loans for ordinary borrowers. Much of that credit has been manageable for the public because they were on fixed-term interest-only mortgage deals, allowing them to part with less in mortgage repayments than other types of mortgage.
As many of the two-year interest-only mortgage deals are now heading towards the end of their lifespan, borrowers are beginning to look around at the options facing them as they seek to refinance in the most economical way possible. So which is the best way to go - tracker, fixed, or variable?
The beginning of 2008 has been an interesting time for the financial markets, to say the least. The continued effects of the ‘credit crunch' have made their presence felt across the world, and with both huge crashes and significant rebounds on the stock markets, it is a volatile time to be a share investor.
Market confidence hasn't particularly been helped by the Société Générale scandal of the rogue trader betting unmanageable and unauthorized sums on the rises and falls of the markets without the knowledge of his superiors. The huge losses encountered by the French bank were significantly more than those that brought Barings Bank to its knees in February 1995.
The stock market jitters have in large part been caused by the crisis that collapsed the sub-prime mortgage business in the US, which has led to record numbers of mortgage arrears, rapidly dropping prices and some of the most pedestrian property markets in the world at the present time. Many of the problems with sub-prime lending, along with the obvious risks attendant to lending to people with blemished credit histories, have to do with the banking corporations trading packages of debt between themselves. This has led to a difficulty in tracking the debt, meaning that many of the banks are unsure of how exposed they are to the dangers of sub-prime borrowers. This erodes the confidence of investors and the stock market alike with alarming speed, and has caused considerable market instability.
The most high-profile casualty of this process in the UK has been Northern Rock, with the mortgage specialist having to declare warnings over its continued presence in the market, and causing borrowers and savers to queue outside branches, crash the website and jam phone lines as they tried in vain to find out what was going on and release their savings. The government decided to prop up the bank by using public money to fund the day-to-day running of operations. In February, Chancellor Alistair Darling announced that Northern Rock was to be nationalized, ploughing more money from the public purse into steering the bank into a position where it could be sold profitably.
The global uncertainty over the health of the US economy, along with most developing nations having their own issues in the stock and currency markets has meant that governments have been prompted into action in order to reassure, massage and try to kick-start their economies.
In the wake of a disastrous week of trading on Wall St, the US Federal Reserve decided to take the decision to slash the base rate of interest by 0.75 percentage points in one day, the steepest fall in over 25 years. Further drops have followed with the realization that the government measures of cutting spending and encouraging business were not enough to bring confidence back to industries or the public.
In the UK, the government and the Bank of England came under public and media pressure to reduce rates immediately, which they resisted. While the Bank of England did eventually reduce interest rates by 0.25 percentage points, the decision not to rush into interest rate-cutting measures seems to have been justified in reassuring the public that there was no need to panic unduly.
The biggest issue to come to light in terms of interest rates at the beginning of 2008 is that many lenders seem to habitually fail to pass on savings to their customers. A recent investigation conducted by the Telegraph has shown that many of the biggest mortgage lenders are in the habit of raising interest rates in the days leading up to the monthly announcement from the Monetary Policy Committee (MPC) on interest rates. This is done in order to make it appear that lenders are passing on the savings directly to their clients, whereas in reality they return to the same rate they were a week before the MPC decision.
The housing market
Various figures in the media and in the property industry have predicted a crash of some kind in the market for some time - some for more than a couple of years - but thus far it has yet to materialize.
Equally, there is little point in pretending that this is not going to be a challenging year for property owners, investors and property companies alike. The arrival of the end of the interest-only period on many mortgages has prompted many into thinking about moving, but they have found interest rates and mortgage companies are in a very different place than they were two or three years ago, so buyers cannot afford to spend as much as they may have been hoping.
Some sectors of the market have seen more properties than usual on the market as a result of the introduction of the government's Home Information Packs. Many buyers rushed their properties to market in order to avoid having to get the packs made up and the expense that this involved, resulting in a profusion of properties coming onto the market in the weeks approaching the quieter period for property sales around Christmas.
However, amid rumours of a market slowdown and with figures being released almost on a daily basis to suggest that property is actually falling in price, first-time buyers who have been priced out of the market amid rapidly-rising prices are beginning to grow in confidence, and are stepping back into the buying arena. The effect this is having is that prices for some properties are holding steady and growing. Vendors are keen to make the most of a new optimism among young buyers, and with buy-to-let investors also emboldened to expand their portfolios with a perceived decrease in prices, competition for so-called starter homes is once again high.
Recently-released figures also show that the very top end of the market is coping well with the economic jitters that have afflicted world economies. City bonuses have continued to grow, and the UK is still one of the favourite destinations for rich international business leaders to make their base in Europe - all of which aids the prestige end of the market.
Deciding which mortgage option is best for you in the aftermath of an interest-only arrangement is something that is difficult to make blanket recommendations on - circumstances change for each individual case. This is where the advice of a professional independent financial adviser (IFA) can ultimately save you thousands of pounds in repayments by making sure you have the right financial coverage for your situation. Research shows that most Brits spend more time researching where to go on holiday than they do on which mortgage is best for them, so you want to make sure you are not in that situation.
The key to making sure you are on the right track with your mortgage choices is to make an informed judgement of what will happen to interest rates in the future. This, in many ways, is part of the problem with people who are re-negotiating their mortgages now because they are finding that fixed-rate mortgages are possibly a couple of percentage points above what they were when they last applied for finance, making this option unrealistic going into the future.
The Council of Mortgage Lenders (CML) has predicted that interest rates will continue to fall gradually until at least the middle part of the year however, given that the present rate of inflation is standing at above the government target of two per cent, it is unlikely that the MPC will be inclined to reduce rates in successive months.
In this case, many buyers will want to consider a tracker mortgage to take advantage of the lower rates, particularly if the downward trend in interest rates persists. Of course, these mortgage deals do have the disadvantage that they rise in the event of the interest rate rising, but many of the funds have an option which will allow you to minimize the risk of this happening to your mortgage. Several lifetime tracker mortgages have no application fees and no tie-ins.
This means that you are protected from interest rate rises by the fact that you are able to leave the tracker scheme at any time and revert to a different kind of mortgage without penalty. Should you be tempted by one of the tracker schemes on the market, and there are some highly-competitive ones available, the key is to move fast. If rates continue to drop, the tracker rates will also drop, and in turn the potential savings you can make will also drop.
Variable rates are the other major option for those coming to the end of an interest-only deal, but this kind of mortgage is more relevant when the interest rates have dropped further and are considered to be coming to the bottom of their ‘curve'. While there are still reductions in rates in the pipeline, a tracker may be the best option. Variable rates are also open to the alleged abuse by the lenders in massaging the rates to their own advantage when it comes time for the MPC to assemble for their monthly meeting.
The financing of your property is the single most important thing to get right, as right from the first property you buy it can influence the amount of equity you build up for future purchases, as well as your immediate lifestyle if you are paying out more than you need to each month.
Research is a key element in deciding what your best option is and you can easily make use of the many price comparison websites that are on the internet. It pays to remember though, that these websites are often middlemen like any other broker, and have a vested interest in your buying through them in order to make money. In this case, you wish to ‘spend' that commission money on getting advice from an IFA as to the very best mortgage on the market for your circumstances. IFAs are bound by Financial Services Authority regulations to give you the best advice, without bias to any product in particular - a claim many of the price comparison sites are unable to match.
With thanks to BuyAssociation.