Struggling to get a mortgage?

Its a sad fact that in todays climate, if you’ve got less than 10 per cent equity in your home, then it’s now very hard to find anyone to lend to you. Nationwide have recently stopped lending to anyone other than existing customers with less than 15 per cent equity and many other lenders have withdrawn high loan-to-value (LTV) deals as well.

When the time comes to remortgage your home and you can’t find anyone to give you a new deal,  you’ll find yourself paying your lender’s Standard Variable Rate. This is usually much higher than the Bank of England rate and can mean a huge increase in your monthly repayments.

Several of the largest banks however reduced their Standard Variable Rates by the full 1.5 percentage points yesterday – and many more are expected to follow suit next week – which means that switching to the Standard Variable Rate may now not be nearly as painful as it once was.

Many lenders may even find that the SVR may actually be less than the rate they are currently paying. For example, as of 1 December, Lloyds and Cheltenham & Gloucester will have an SVR of just 5 per cent.

The flipside of being on a bank’s SVR, however, is that your mortgage rate is controlled by your lender and can change whenever the bank wants it to. So if there are future bank rate cuts, there’s no guarantee your rate will fall, although it’s fairly likely that you’ll pay more if the bank rate rises.

Currently less than 5 per cent of the country is paying the SVR, but Hollingworth believes this is likely to increase as more and more people find themselves with little or no equity in their homes and unable to remortgage.

With SVRs at much lower levels, it may make sense for people to avoid remortgaging where possible, even if they have equity in their home. Remortgaging costs money – legal fees, valuation fees, and hefty arrangement fees. If you can stay with your current lender, you can avoid all of those charges. If you are thinking of remortgaging, take the fees into account when calculating whether your new deal works out any cheaper over two or three years.

Help…we’re buying a new house

If you’re buying a property, and are looking for a new mortgage, you’ll find that there’s not much on offer at the moment. This week, almost every lender withdrew all of their new tracker mortgages, as they waited to see what the Bank of England would do with interest rates. Meanwhile, there are very few discount rates available either.

If you’re looking for the good deal, the best thing to do is to wait for a few days. Lenders are expected to begin offering tracker mortgage products next week, although it’s not clear how far they’ll be priced above the bank rate. Tracker rates are still the throught to be the best option if you can get them, as almost all economists are predicting that the next rate in interest rates will be down – maybe even as soon as next month. The most pessimistic economists are predicting that rates may go down to 0 per cent.

If you do opt for a tracker, however, watch out for whether your deal has a “collar” – a rate below which your mortgage cannot fall. Nationwide and Skipton Building Societies are amongst a handful of lenders who already have collars on all of their tracker mortgages. In the case of Skipton, its collar is 3 per cent, which means that now the base rate has hit 3 per cent, its customers will see no further reduction if the bank rate is reduced further.

David Black, the head of banking at consultants Defaqto, believes that once banks begin to reissue trackers next week, collars will become even more prevalent. “When the new ranges of trackers get launched, you can expect far more to have a collar,” says Black. “I expect you’re also going to see bigger margins [between the mortgage rate and bank rate] as well.”

At the moment, one of the only trackers on the market is being offered by HSBC, at 0.99 per cent above the Bank of England rate. However, you’ll need a deposit of 40 per cent to qualify. If your finances wont stretch that far, Earl Shilton Building Society has a product which charges bank rate plus 1.75 percentage points – and you only need a 20 per cent deposit to qualify.

If you can’t wait to get a new mortgage – or you prefer the stability of knowing what your monthly payments will be – there are still plenty of fixed-rate products on offer. In light of expeced rate cuts in the future, fixed rates look particularly poor in value.

Woolwich, for example, has a two-year fixed-rate deal at 4.99 per cent, which is almost 2 percentage points above the current bank rate. If you can, hang on for a few weeks and there should be some much more competitive fixed-rate products available on the market.

I’m on a fixed-rate deal

Unfortunately, if you’ve got a fixed-rate deal at the moment, then you won’t see any benefits from this week’s rate cut. However, the chances are that you’ll have to think about remortgaging within the next couple of years, and, with a bit of luck, mortgage rates should be even lower than they are now by the time you start to shop around.

Even if your current deal is about to end, it’s probably worth hanging on a few weeks to see what deals emerge now that the Bank of England rate has come down. Significantly, Libor – the rate at which banks lend to each other, which is much more important when it comes to pricing mortgages – also fell significantly yesterday, increasing the likelihood that the banks will bring out some much cheaper deals over the coming days.

Melanie Bien, director of independent mortgage broker Savills Private Finance, says: “The significant fall in three-month Libor is more important in terms of new borrowing rates than the drop in base rate. Lenders have pulled their trackers and have been waiting to see what happens with inter-bank funding – they will now be under huge pressure to pass most of it on.”

It’s now all but impossible to get a mortgage if you have less than 5 per cent equity in your property, so keep an eye on property prices in your area, and if you think you’re in danger of hitting negative equity, try and make some overpayments to your mortgage to keep yourself in the black.

I’ve got a tracker/ discount mortgage

If you’re one of the lucky people to have a tracker mortgage, you should see your monthly repayments drop substantially next month. For example, if you have a £200,000 loan with 20 years left to run, your payments should fall by as much as £180 – depending on how much more you were paying above the Bank of England interest rate.

Those with discount mortgages should benefit as well. Discount deals are pegged to a bank’s standard variable rate (SVR), and many of the major lenders have begun to cut their Standard Variable Rates over the last two days. Others are likely to follow early next week.

However, David Hollingworth of London & Country mortgages, the fee-free broker, says that while it may be tempting to pocket any saving you make if you have a tracker or discount deal, it makes sense to consider using some or all of this money to pay down your loan quicker.

As house prices continue to fall, the amount of equity in people’s properties is diminishing. According to the Nationwide Building Society, house prices have fallen by almost 15 per cent over the past year, which means that if you bought your home for £200,000 last autumn, it may now only be worth around £170,000 now.

So, if you had a deposit of 25 per cent of your purchase price £50,000, you would have started off with 25 per cent equity in your home but will now have less than 15 per cent. You may find that once you come to the end of your current mortgage deal and have to remortgage, this becomes a problem, as few lenders at the moment are willing to lend more than 85 per cent of a property’s value.

Where possible, make overpayments on your mortgage to ensure you stay in the black, Hollingworth says that families are more likely to be able to get a mortgage next time around.