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

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.

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch
    Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

    Dame Harriet Walter interview

    The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
    Art should not be a slave to the ideas driving it

    Art should not be a slave to the ideas driving it

    Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
    Bill Granger recipes: Our chef's winter salads will make you feel energised through February

    Bill Granger's winter salads

    Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
    England vs Wales: Cool head George Ford ready to put out dragon fire

    George Ford: Cool head ready to put out dragon fire

    No 10’s calmness under pressure will be key for England in Cardiff
    Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

    Michael Calvin's Last Word

    Time for Old Firm to put aside bigotry and forge new links