Winners and losers in mortgage market
Interest rates have probably sunk as low as they can go, and as the Bank of England starts pumping another £75 billion into the economy by buying bonds and corporate debt from banks, millions of homebuyers, and others keen to buy, need a “safety first” strategy through a severe downturn.
The past year produced big winners and losers among borrowers.
The winners are 3.5 million borrowers on tracker loans – including many buy-to-let landlords – who enjoyed an unexpected windfall, especially if no collar was in place to peg their rate at a specified level.
Ray Boulger at leading brokers John Charcol says: “The latest base rate cut to an historic low of 0.5 per cent means many borrowers have wiped roughly 90 per cent off monthly repayments on interest-only loans.
“Someone with an interest-only mortgage of £150,000 and rate equivalent to Bank rate, was paying £625 a month six months ago. Now, they’re paying just £62.50 after this latest reduction. Some borrowers with deals priced below Bank Rate are paying nothing.”
Some borrowers on Standard Variable Rate (SVR) deals – often the easy option when fixes expire – have thrived too. C&G and Nationwide have an underlying guarantee to be never more than two per cent above base rate, while Halifax and Skipton are never more than three per cent above.
The big losers are on fixed rate loans, some paying rates as high as 6.5 per cent for another 18 months.
In the toughest scenario, their LTV (loan to value) ratios may be so high – as prices fall – that it is near impossible for them to switch lenders.
Borrowers trying to escape a fix before it expires can be clobbered by early repayment charges running into five figures: the ten-year fix from Britannia BS, for instance, makes a charge in the first three years of eight per cent of the sum outstanding.
Borrowers trying to ensure they handle their mortgages properly in a tricky market have a number of options to consider.
One is to overpay, where possible, to grow the level of equity in their home faster, which makes it easier to get a good deal on the next mortgage.
HSBC says a typical borrower taking a tracker mortgage in October 2008 for £112,756 is now saving over £218 per month on their initial payment. By leaving repayments unchanged, they will pay off their mortgage nine years and three months early, saving nearly £14,000 in interest charges.
Also, they should think hard about the best moment to take a fix.
Cath Hearnden, at My Mortgage Direct says: “A lot depends on what your house is worth. Those with loans near 75 per cent LTV should look at a longer term fix, because they could come unstuck in a couple of years if prices keep falling and they have to move.”
