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The time is right to reduce your mortgage borrowing

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.

Hope for the housing market from the Council of Mortgage Lenders

A recent report by the Council of Mortgage Lenders has revealed that the number of homes repossessed in the UK fell by 7.5% in the first three months of 2010.

Home repossession is one of the ultimate fears for any homeowner, and the fact that the figure is falling is perhaps proof that the nation’s finances have recovered a little.

Repossessions fell from 10,600 homes in the final three months of 2009 to 9,800 in the first three months of 2010. Most encouragingly, that number was 26% lower than in the same period of 2009 when an enormous 13,200 people lost their homes.

The CML said that the main factor in the drop in repossessions was the drop in the interest rate. In March 2009, partially in response to the rising number of people losing their homes, the Bank of England dropped its base interest rate to 0.5% and has kept it there ever since.

That meant many people on the precipice of default, even those who became unemployed, managed to avoid losing their homes.

On the back of these positive figures, the CML has said it may revise its original forecast of 53,000 repossessions for the year should there be no further economic downturn.

The news did, however, come with a warning from the CML. If interest rates were to increase, it warned, many hundreds of thousands of people could struggle to meet higher repayment costs and face the prospect of repossession. It warned that the Bank of England needed to keep the rates low for as long as possible, even in the face of rising inflation.

Mortgage interest rates have, however, fallen to record lows for those customers with a sizeable deposit and good credit history. The personal loans market is also improving steadily; Santander’s flagship product for existing customers has a typical of 8.9%, and secured loan rates are falling to levels more in line with previous years.

This news from the CML is positive, though there is a warning that things could deteriorate at any moment, so we should not forget that even though the numbers are dropping, nearly 10,000 people lost their homes in the first three months of this year, the economic crisis, whatever the figures may say, is very much still with us.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT. WE TYPICALLY CHARGE AN ADVICE FEE OF £299 PAID UPON FULL MORTGAGE OFFER. SOME BUY TO LET AND COMMERCIAL LOANS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
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