Good news – record low interest rates mean the number of home repossessions is falling. But the bad news is that there could be dangers ahead with borrowers sleepwalking to disaster. That’s the view of banker-turned-mortgage adviser Stuart Gregory, who says borrowers need to check their rates and act to get a decent deal before it’s too late.
“The continual low interest rates have kept people safe in their homes, while household bills have rocketed,” he pointed out. “Once interest rates begin to climb, the true pain of those utility bill rises will be felt.”
It’s just one reason why he fears repossessions will start to climb again as people struggle to meet their bills. For then there’s the added complication of new mortgage lending criteria. “We’ve had huge changes in borrowing rules since the beginning of the recession, and again when the Mortgage Market Review came into play in April 2014,” said Mr Gregory, managing director of the Lentune Mortgage Consultancy.
Just over a year ago, lenders were handed responsibility for ensuring that borrowers could afford loans. Failing to advance money responsibly now means they face penalties and fines. As a consequence, borrowers – including those remortgaging – face a barrage of fresh obstacles and, often, interviews lasting hours, before they’re granted a loan.
“Most of the UK hasn’t experienced this, as they’re told by Mark Carney [Governor of the Bank of England] that ‘rates won’t rise yet’,” said Mr Gregory, who believes there’s a false sense of security among homeowners. “People are effectively waiting to be told when it will be time to remortgage. They don’t feel under threat because of the Bank of England approach.”
He warned that borrowers with interest-only loans are in the worst position. “They probably don’t even know yet how hard it will be for them to remortgage. Getting an interest-only loan has become much more difficult in the past six years.”
Part of the problem is that the focus is on when the Bank base rate will rise. Mr Carney has intimated that it won’t be for some time, at least until 2016 and maybe later. That suggests borrowers are safe to carry on as they have done in the past few years with no fear of a sudden rate shock. But that ignores how fixed-rate mortgages work.
“When a lender prices a fixed rate, it’s based on the cost of borrowing funds from the money markets – the base rate itself has little effect,” Mr Gregory explained. “By the time most borrowers act on the eventual warnings from the Bank, it’ll be too late. Lenders will spot the signs of change, and gradually increase the fixed rates they offer.”
Standard variable rates also work independently of the base rate and tend to be driven by competition instead. Many may already be much higher than borrowers realise, with lenders charging around 4 per cent, even though the base rate is at 0.5 per cent.
“We’ve turned from a nation obsessed with remortgaging every two years, to one where people now don’t even know their options, which is a scary prospect,” Mr Gregory said. “Those who were approved for a mortgage in 2008 may not be approved now – even for the balance they already have.”
There’s plenty of food for thought there for borrowers. The key message is don’t assume that all will be fine in the future – it won’t.
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