Mortgages - between a Rock and a hard place

Remortgaging, or moving your mortgage for a better deal, has become a nightmare rather than the surefire way of saving money that it was even just a few months ago. According to data analysts Moneyfacts, there are now fewer than 4,000 different types of mortgage on offer, compared with more than 11,000 last July, and a peak figure of around 15,000.

Latest figures released by the Bank of England revealed that the number of home loans approved in May had fallen to 42,000, a 27% decline compared with April, a 64% drop compared with the same time last year, and the lowest number since the Bank began compiling home loan records in 1993.

Since the credit crunch, banks and building societies have tightened their lending criteria, making it harder for new buyers to get home loans and for existing borrowers to switch.

Not only are borrowers increasingly unable to move their mortgage every so often simply to get a better deal, as they had become accustomed to doing, they are becoming the victims of "mortgage shock" - a huge hike in the rate they need to pay when they come off a special deal.

How much will your mortgage repayments be?

It is estimated that more than a million households due to come off fixed-rate deals this year will not be able to remortgage, and will have to stay with their previous lender on a much higher rate.

Among those worst affected have been Northern Rock borrowers. While Lloyds TSB has done a deal with the Rock and agreed to take on certain of its customers, starting this month, Lloyds TSB has set a maximum "loan to value ratio" (LTV) of about 80% for the mortgages it will take on. This means that those who took on 100% loans recently, or worse, Northern Rock's 200,000 Together mortgage customers, who were allowed to borrow as much as 125% of their property's value, are going to end up stuck on the Rocks expensive standard variable rate of 7.49%.

The trouble for recent buyers is that, while they may in theory have been gaining equity in their homes as they made payments to reduce their mortgage over the past year or two, the ongoing fall in house prices could see them back to square one in terms of loan to value. So what can borrowers do?

Shop around

If you are faced with the need to remortgage - either because you have come to the end of a fixed-rate deal or your current rate is untenable - you need to shop around well in advance of the date your existing deal ends, to enable you to investigate all the options.

Moneyextra's mortgage calculators can help you work out what you can afford.

Check your LTV

First of all, calculate the loan amount you need in relation to the value of the property - the LTV. The best deals are reserved for those with an LTV of 80% or less.

If you are worried that you have not made any headway in reducing the loan to value, take heart from research from GE Money Home Lending, which reveals that a typical homeowner who bought as recently as 2004 has an average "equity cushion" of 48%. The average house price would need to fall by almost half before value of the loan exceeded property value.

Are you looking to remortgage to get a more competitive interest rate?

The average London property purchased in 1995 would need to depreciate by three quarters (72%) for the owner to encounter negative equity, while a homeowner from Wales who bought their property at the turn of the century has an equity cushion equal to over half the value of the home.

If your LTV exceeds 80%, there are still lenders offering 90% and sometimes 95%, although you may have to pay more in terms of interest or a higher arrangement fee. You may, however, be able to add this fee to the loan - not an ideal situation, as you will then be paying interest on it - but if you can't afford to do it any other way, this method can be a lifeline.

07 July 2008 © Moneyextra.com

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