Covid-19 has had a massive impact on the mortgage marketplace, with some lenders withdrawing altogether and thousands of products withdrawn from sale. The outlook is not as gloomy as you may imagine if you need to remortgage.
If your current deal is about to end, ends later this year, or if you want to
remortgage to consolidate commitments and reorganise your finances, what options are there, and what should you do?
If your mortgage deal is ending soon
Firstly, if your current deal ends imminently, whilst there has been a reduction in the number of lenders and products, many of those withdrawn are for house purchases or higher-risk lending.
Most lenders continue to offer product-transfer deals for existing customers; many still offer remortgage deals for new customers, and we can arrange these for you without any advice fees. So we can typically advise you on options from the whole of the market and your current lender simultaneously.
If your income has fallen, this might affect your ability to change lenders but would not prevent you from transferring deals with your existing lender.
If your mortgage deal is ending within the next 6-months
For anyone whose existing deal ends by late Autumn, now is an ideal time to think about remortgaging.
Several lenders’ remortgage deals are valid for six months, so you can apply well in advance, taking advantage of the low current rates and arranging everything ready to switch over as soon as the current mortgage deal expires.
There are several reasons why doing this now could be wise. Firstly, although lenders have not passed on the full rate reduction made by the Bank of England into new fixed-rate mortgage deals, there is a good chance that this never happens.
With vast financial losses in every industry, it is difficult to imagine lenders vying to cut into vital profit margins when rates are already at all-time lows.
Conversely, we could see a reduction in house prices or even lenders pulling out of the market entirely, creating a situation where you were better off applying today than in several months.
No one has a crystal ball to predict how the market will progress over the year, but the likelihood of rates getting significantly better than today seems dim.
Consolidating credit commitments into your mortgage
This is where the remortgage market has already shrunk significantly. So, if you want to trim down your outgoings and reduce your typical monthly commitments, it may be wise to act now rather than wait.
Be aware, though, that consolidating credit commitments into a mortgage often presents poor value for money. And may be more expensive than alternative options, like balance-transfer deals or converting credit card debts into a personal loan.
It is also important to note that you often convert unsecured credit commitments into one secured against your home. That means you stand to lose your most precious asset if you default, where previously, there may have been no risk of this at all.
We can help you understand whether a debt-consolidation remortgage is the correct solution for you.
Changing your mortgage term
You do not necessarily have to wait to remortgage to alter your mortgage term and, therefore, your monthly payments (for anyone on a repayment loan).
If this is something you want to look at, you can speak to your lender, and you may be able to do this midway through an existing deal, even if you have early repayment penalties.
Again, you can possibly change the term when you remortgage or product transfer, and if you want to reduce your outgoings in this way, get in touch to discuss your options.
If you are in financial difficulty
If you are experiencing difficulty making payments, your first port of call should be your existing lender to discuss options to prevent you from getting into arrears, including the government’s payment holiday scheme.
If there is a risk of you defaulting on obligations like a credit card, loan, hire purchase or other non-secured credit commitments, then consolidating these into your mortgage is a potential solution.
But this increases the risk of losing your home by converting unsecured commitments into secured debt.
We can help you get an understanding of whether consolidating commitments is a solution that could be viable for you.
But you should consider speaking to stepchange.org & the Citizens Advice Bureau about the implications of getting into arrears on either type of commitment and other options that may be available, such as an IVA.
The coronavirus has caught governments, businesses and consumers off guard, so the situation is continuously changing, but there is good news for most people.
Firstly, for those who want to remortgage during the current lockdown, to consolidate commitments, or whose current deal is due to end soon, mortgage lenders are still lending, and our advice service goes on as normal. We can work with you entirely over the phone and online.
We will follow this article shortly with a discussion of the Bank of England Base Rate reduction and how this affects borrowers looking at a new mortgage. But for those with existing mortgage offers, there is further information below.
Due to the lockdown, most lenders have ceased physical valuations temporarily, so lending will likely rely on an electronic valuation (i.e. an estimate based on previous sale prices and local market trends, like estimates on sites like Zoopla).
That may mean you have difficulty if you have spent significant sums renovating a property and want to consolidate commitments into your mortgage.
Reports of lenders closing funding are based on a handful of small specialist lenders (new to the marketplace anyway) ceasing to offer new lending. Some larger lenders have limited their purchase lending loan-to-value limits, but purchasing currently seems unlikely.
Managing mortgage payments and difficulties in paying your mortgage
The most important thing for you as a consumer is that if you believe you will have difficulty paying your mortgage, you should contact your lender as soon as possible. Discuss with them the options they have for helping you manage payments.
On residential loans, i.e. properties occupied mainly by you or your family, the lender is legally obliged to try and prevent you from going into arrears.
That means they must consider offering solutions such as a temporary switch to interest only, if suitable, or consider alternatives like increasing the term or taking a payment holiday.
You should engage with them early as going into arrears will incur costs that may be non-refundable, avoidable, and any arrears recorded on credit reports are unlikely to be removed in future.
Arrears will also worsen future costs and the options available when you remortgage.
Bear in mind that any proposed solution will likely cost you more in the long term. So, it’s not a gift or freebie, and it may not make sense if you have plenty of savings to carry a short-term drop in income.
The situation is less clear for those with buy-to-let mortgages, especially as many will be interest only, and therefore, payment holidays are the only temporary solution available. It is unclear if the government’s statement about payment holidays will apply to commercial lending.
You should still contact your lender early to discuss what assistance they may offer if you are facing difficulties or non-paying tenants.
Lenders are unlikely to want to take punitive action against otherwise good borrowers for a problem that will affect them across their whole lending book, so they are likely to be magnanimous.
Registers of Scotland Shutdown
We have become aware of clients whose sales are pending soon and are experiencing difficulty due to the government closing the Registers of Scotland (the Scottish Land Registry).
Discussions between The Law Society and the Scottish Government are ongoing, and it seems likely that a solution is imminent. Until this point, Scottish sales will not be able to complete.
Bank of England Base Rate Changes
If you are considering a new mortgage, I will write shortly to expand on how the changes to the Bank of England Base Rate affect choices on new mortgage products.
For those people who are about to complete their mortgage soon, they present a dilemma.
Fixed-rate mortgages are unlinked to the BOE base rate, so the reduction in this has not yet passed through to most fixed-rate mortgages, although one or two drops have popped up.
As lenders will be extremely hard hit by the lockdown, they might seek to increase their margin on lending, so these rate reductions might never be passed onto fixed rates fully.
That means most borrowers can either wait to see fixed rates come down (when they could even go up) or switch to some form of variable product, such as tracker rates, which have reduced as they follow the BOE rate.
However, no one currently offers tracker or variable-rate mortgages with any cap or upper limit that I know of, and given that this is a time of unprecedented global turmoil, wild changes to interest rates are not outside of the realms of realistic possibility.
10-year fixed-rate mortgages have been reducing significantly in cost, and for the first time in the UK, it’s now possible to get a pretty competitive rate fixed for ten years. But the big question is should you get one?
Question 1: Is a fixed rate even appropriate for you?
Forget ten years. Should you even have a fixed-rate mortgage?
Lots of people get caught out by significant early repayment penalties due to not properly considering the question of their long-term plans before buying.
Will you be moving home, repaying large balances early, hoping to raise significant additional finance from the property or could you be eligible for better deals in the short term if your circumstances improve?
Before considering a fixed-rate mortgage, look at our guide to fixed-rate products and see how they work versus other rates. Pay real consideration to whether the points above could leave you paying redemption penalties of many thousands of pounds.
You should speak to an independent mortgage broker like us as well.
Question 2: Will fixing for ten years be competitive long term?
If you had a crystal ball, you could answer this question, but no one can see into the future.
When a lender prices a product, it’s either based on the cost of borrowing that money from another bank or investor and turning it into mortgages, or on the expected interest rate they will pay to their depositors over that time.
So the simple fact is that a fixed-rate mortgage will be priced based on the expectations of what will happen to interest rates over the term & the lender will expect to profit.
That means the current glut of competitive long-term fixed deals indicates that the banks expect a prolonged period of relatively low-interest rates in the UK well into the future.
So like odds given by bookies, most banks will not expect average interest rates over the fixed period to be higher than the rate they are offering you. So you are in effect betting against the bank, but they have been known to be quite spectacularly wrong in the past.
The smaller your mortgage though, and the shorter the remaining term (for someone on a repayment or capital and interest mortgage) the less differences in rate will impact the long-term cost.
Because of this, for each loan, there will come a point as the remaining term decreases when small differences in rates are outweighed by the repeated fees involved in refinancing a mortgage, and changing products regularly offers poor value for money.
This is very case-specific, but once your mortgage reaches that point the potential downsides of long-term fixes may become insignificant.
Question 3: So, who should take a 10-year fixed-rate mortgage?
If you are concerned about increases in costs, have no circumstances that might better suit variable rates, and are sure that the early repayment penalties won’t be likely to cause an issue, then you need to decide whether you feel it’s worthwhile gambling long term and risk paying more than you might need to, or whether to take a short-term product in the hope that you can secure another competitive rate again in a few years.
This decision is mainly going to come down to the margin between short-term fixed rates and long term ones. Also, the probability that changes to your circumstances make better deals available to you in the short term (such as better income making more competitive lenders available, or works to a property decreasing your loan to value), and whether you feel the additional cost is good value for the extra security.
A mortgage advisor such as ourselves will discuss your circumstances with you and give guidance on whether a fixed product is more appropriate for you. If a fixed rate is the best option for you, but it comes down purely to a decision between long and short-term deals then this is very much a decision best made by the customer, but at least we can present you with the best options available over the different periods so you can make a more informed decision between them.
If you’d like to know what the best deals available to you both in the short and long term could be then complete our enquiry form and an advisor will contact you, to discuss your options and provide you with advice.
In the last two weeks, both Natwest and Coventry Building Society ceased offering interest-only mortgages for residential property following Nationwide’s decision to do the same some time ago.
Add to this the vast number of lenders who have restricted interest-only borrowing to less than 75%, 66% or even 50% of the property value and the market for these mortgages is now stricter than ever.
Borrowers on interest-only mortgages currently sitting on their lender’s variable rate should consider changing their mortgage to a new product now before the market contracts further.
With the FSA’s announcement that interest-only lending would become part of the mortgage market review following the credit crunch, many lenders have reacted in a kneejerk fashion, and Eliminated the option for customers with a suitable repayment strategy to refinance their loan regardless of the plausibility of their circumstances.
This is already creating a large number of mortgage “refugees” unable, simply due to the lender’s criteria to arrange a new mortgage and who then become trapped on a variable rate without the option to move.
Whilst this may not be the end of the world whilst the Bank of England Base Rate is low it could result in thousands more repossessions in the event of the collapse of the Euro.
This scenario would almost certainly see wholesale increases in lenders’ standard variable rates which many borrowers might find too large to handle.
For those in the last years of an interest-only mortgage or even halfway through with borrowing of more than 50% of their property value, waiting too long to consider a move to a new product could see them shut out of the market in the long term.
Of course, for those borrowers without a suitable strategy for repaying an interest-only loan, then this is the right time to think about switching either to a full repayment mortgage or alternatively, if investments such as endowments are not performing and are predicted to fall short of requirements, a part repayment and a part interest-only loan might be suitable.
For more information contact one of our whole of market advisors on 0845 4594490.
Whilst it remains unclear how close we are to a collapse of the Euro, one thing is clear; predicting how the fallout would affect financial markets is no easy task, even for seasoned financial experts.
In pure mortgage terms, one set of products appears to be particularly risky in the current market; is any which tracks a variable rate as opposed to the Bank of England base rate. These include discounted rates, variable rates and Libor-linked or Libor-rate deals.
All of these products could be subject to increases if the Euro collapsed, even if the monetary policy committee of the Bank of England decides to keep interest rates low.
When the BOE base rate was reduced heavily in 2008, many lenders did not pass these cuts into their variable rates for some time; as doing so would have seriously jeopardised their ability to remain afloat.
Similarly, in the scenario of the collapse of the Euro and or the default of a nation such as Greece, Spain or Italy, this would undoubtedly cause a similar crisis in the banks leading to a drying up of money markets and upward pressure on banks’ variable rates.
Most discount-rate mortgages are offered by smaller building societies, which typically have a much lower risk exposure and would be better insulated against having to raise their variable rates significantly in a similar scenario. However, they are not immune to this risk.
More concerning, though, are Libor-linked deals; these are linked to the going rate of lending between UK banks and could rise a lot if we saw more market turmoil.
Even so, tracker deals could still be a risk; who knows how the different repercussions of this kind of event could ultimately play out?
So when looking at current products, comparing the difference between fixed and variable rates, in general, is well worth doing. I would take a pragmatic approach where the difference is minimal, as it seems likely that the last string of bailouts may yet prove to be the tip of the iceberg.
