Mortgage prisoners: Now could be the time to break free
Many householders pay too much for home loans by sticking with their original lenders when there are better deals out there, says Chiara Cavaglieri
Sunday 09 December 2012
There has been a great deal of talk about "mortgage prisoners", and although tight credit conditions do continue to plague some households, evidence is building that many borrowers can and should be looking to remortgage to a better deal while they can.
New research from HSBC estimates that 4.4 million borrowers, representing 39 per cent of the total mortgage market, are currently stuck on their lenders' standard variable rate (SVR). Most are paying over the odds with the average SVR at a hefty 4.86 per cent and the likes of Santander, Co-operative Bank, Yorkshire Bank and Bank of Ireland all increasing their rates of late.
Despite this, the bank says an estimated 3.6 million of these borrowers have loan-to-values (LTVs) below 85 per cent and could therefore snap up a better mortgage rate – up 24 per cent on the number of "free to move" customers this time last year.
"With so many negative stories suggesting how difficult it is to get a mortgage, many people will be sitting on their lender's SVR assuming that they can't remortgage.
"However, it is always worth checking to find out whether this really is the case as you may be pleasantly surprised," says Mark Harris of mortgage broker SPF Private Clients.
It's too early to tell if the Bank of England's Funding for Lending scheme, which was brought in to stimulate lending, will have any meaningful impact. Quarterly figures show overall lending rose by £496m, but loans by six of those signed up to the scheme actually fell during the same period. Yet the incentives are there for the banks – if they want cheaper funding, they will need to increase their volumes – and the top mortgage rates have fallen to record lows since its launch.
"There is certainly a heightened level of competition and lenders are keen to attract new business with extremely low interest rates," says David Hollingworth of broker London & Country.
Only last week HSBC launched a new two-year fixed rate at just 1.99 per cent, and the Co-operative Bank has a five-year fixed rate at 2.79 per cent, although both deals are only available to 60 per cent LTV and come with large fees of £1,999 and £999 respectively. For a borrower with a £150k repayment mortgage over 25 years, a rate of 4.74 per cent (the Santander SVR) would pay £854 per month, while the same mortgage would cost £695 per month on the Co-op's fix.
"Co-op also offers a keen, five-year fixed rate of 3.79 per cent at 85 per cent LTV with a £999 fee which would give a monthly cost of £774," says Mr Hollingworth. "This illustrates that although those with less equity will need to pay a higher interest rate they can still cut their payments".
Many borrowers languishing on their lenders' SVRs have come off fixed or discounted-rate mortgage deals which were available two or more years ago and are now free to remortgage without having to worry about early redemption penalties.
The best remortgage deals are naturally reserved for customers with low LTV ratios and for sub 4 per cent deals you need a minimum 15 per cent equity (85 per cent LTV), but HSBC's research shows that a significant 32 per cent of the total mortgage market are in this position.
There are some notable regional differences; Wales has the highest proportion of "free to move" SVR borrowers (38.8 per cent), followed by the North-west (35.1 per cent). London also has a large number of borrowers with enough equity to remortgage, thanks to above-average house price rises over the past few years.
The potential savings are not to be sniffed at – on a loan of £150k, on a typical SVR of 4.86 per cent, a borrower with 15 per cent equity could save of £1,034 in annual interest by moving to HSBC's two-year discount rate of 3.84 per cent.
For SVR borrowers on LTVs of 85 per cent or above, the picture isn't so rosy. There are around 839,000 borrowers without enough equity to remortgage cheaply, representing 7.4 per cent of the market, many of whom have come off two to five-year discounted or fixed-rate deals taken between 2007 and 2010.
The regions with the highest proportion of mortgage prisoners are the North-west (10.2 per cent) and North (9.9 per cent). With insufficient equity, these borrowers are stuck and unable to move to a more competitive rate, with no chance to do so until house prices move up.
The good news, however, is that HSBC estimates for every 1 per cent rise in house prices approximately 40,700 borrowers would move into the under 85 per cent LTV band when the world of competitive mortgage rates opens up to them.
If you do want to remortgage, start with your existing lender as they may offer you a cheaper fixed or tracker rate. Compare whatever your lender offers you with other lenders, using an independent mortgage broker to cover the whole market. If you do end up moving to a new lender, they will need to check your income and outgoings to ensure you can afford the mortgage, so consider whether you are in a strong position before making an application.
"If your income has dropped since you took out your mortgage you might not meet the lender's criteria requirements and will need to stay put," says Mr Harris.
Equity is key to getting better remortgage rates, so if you have savings sitting in an account earning little interest it would be better spent paying off a chunk of your mortgage. A decent LTV will mean more options and better rates, so dropping down by as little as 5 per cent can make a real difference.
Switching to a cheaper rate isn't always the best policy though. If you have a small mortgage, or it only has a few years left to run, it might make sense to stay on the SVR rather than remortgage onto another deal as any savings you might make may be wiped out by charges.
"Some of the best rates come with hefty arrangement fees, plus there are also valuation and legal fees to consider if the lender is not offering a remortgage package where these come free," says Adrian Anderson of mortgage broker Anderson Harris.
"You may also not wish to commit yourself to say, a five-year fix, when on the SVR you have complete flexibility as there are no early repayment charges," he adds.
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