Many people blame subprime mortgages for the credit crunch; others point the finger at merchant banks and hedge funds, whilst some have even suggested that China is directly at fault for the current state of Western finances.
To a certain extent, all these views carry some merit (particularly regarding the subprime mortgage sector). But another factor that comes into play regarding those mortgages; is perhaps more fundamental and likely to cause long-lasting damage.
Over the last decade and a half, the average house value skyrocketed. Some houses increased by as much as 100% in value over a decade. This rise in prices; sustained by a ready supply of credit on increasingly generous terms; increased demand massively, and due to the relatively fixed housing supply, the only place prices could go; was up.
That resulted in large numbers of people taking loans far beyond their means. It seemed that everyone could get a large enough mortgage to pay for a house regardless of their financial circumstances.
For those who have stretched their income, now is the perfect time to reduce your borrowing and save money in the long term on your mortgage repayments.
The new government and the recent emergency budget indicate we should see relatively low-interest rates for some time, although the bank base cannot remain this low forever.
So it is time to look at remortgaging, and trackers, in particular, can look like good value for money in the short term.
There are several ways to reduce your mortgage in this period of low-interest rates.
You can remortgage and reduce your mortgage term, but pay attention to how this will affect your repayments when rates do rise.
Another option is to look at offset mortgage products which allow you to pay no interest on the equivalent amount of savings held in the offset account; however, offset rates continue to be uncompetitive.
For many, the best way to reduce your mortgage may be to use a savings account and then use the typical 10% overpayment facility on most products.
It’s worth checking whether you have the right to make overpayments and to what extent. Savings interest rates aren’t too attractive currently, but banks like Santander offer some excellent deals on savings accounts that are worth a look.
If you’ve survived the bubble bursting; whatever state your finances are in, it may be a good idea to pay down any debts you have whilst interest rates are low and save what you can to give yourself a bit of a cushion; so should the situation deteriorate further, or if interest rates rise in the future, you are less exposed to increasing costs.