If you’ve had the same mortgage for a while, or are sitting happily on your lender’s standard variable rate (SVR), you could be oblivious to some of the changes that have taken place in the market over the past few years.
Lenders have been busy altering criteria which, combined with house prices that have yet to recover to their 2007 peak, means you could struggle if you ever decided to move your loan to another bank or building society. Here are some reasons why you might be a mortgage prisoner, and what action you can take if you decide to switch.
You have an interest-only loan
A few years ago almost any lender would let you take out a mortgage on the basis you would pay off the interest each month, but only repay the original loan at the end of the 25-year term. They would ask that you had a plan to repay that debt – maybe an investment or expected inheritance – but tended not to make checks.
That has changed. After the Financial Services Authority suggested it would crack down on interest-only mortgages, lenders tightened their conditions. At the start of 2012 Santander said it would only offer interest-only deals up to 50% loan-to-value (LTV) and Lloyds TSB introduced restrictions on the repayment vehicles it would accept; now the Co-operative Bank and Nationwide building society are no longer offering interest-only mortgages, although both have said existing borrowers can switch to new deals.
“That has ramifications not only for those that have no repayment vehicle, but also for those that have been contributing to [one],” says David Hollingworth of mortgage brokers London & Country. Even if you have been putting money aside to cover the loan, you will find you can’t just remortgage to a new deal at Nationwide or Co-op without doing so on different terms.
To improve your chance of getting a new loan you might be able to cash in your investment and use the money to reduce the monthly repayments on a new repayment mortgage.
Alternatively, Mark Harris of Savills says: “Consider switching some of your mortgage onto repayment; this may make you more attractive to lenders and enable you to remortgage onto a better rate.”
Obviously this has happened to everyone, but at the same time lenders have changed maximum age limits. “A number of lenders won’t lend to borrowers past retirement age, although some will lend up to 75, as long as the retirement income is enough to service the mortgage payments,” says Adrian Anderson, from mortgage broker Anderson Harris.
“We have definitely come across older borrowers finding they have run out of options,” Hollingworth says. As well as people who bought homes late in life, some of these may be parents who remortgaged their home to release equity for their children to buy a home. There are also some parents who took on joint mortgages with their children. “If they can no longer meet the lender requirements then that could limit the remortgage options and leave them stuck where they are until the child can reach the point that they take the mortgage on in their own right,” Hollingworth says.
If you can afford to, you could shorten the remaining term of your mortgage. This will increase your monthly repayments, but the loan will cost you less in the long run and you maximise your choice of lenders. Alternatively, you could seek out one of the more flexible lenders. Leeds building society will let you borrow up to the age of 80 as long as you are not older than 70 when you apply and the Mortgage Works ill lend until age 90.
Your house is worth less than when you bought it
Figures from Nationwide suggest that in many areas of the UK prices remain well below the peak they hit in 2007. So you could have aproperty worth less than you paid for it. If you didn’t have a big deposit when you bought it you could even be in negative equity.
In this instance remortgaging to a new lender is likely to be out of the question, but you may still be able to get a better deal from your existing bank or building society. “Some lenders will let existing clients remortgage on to fixed or tracker rates, and in some cases will even let you move house, so it is always worth asking the question,” Anderson says. “Otherwise, you may be stuck until the property price recovers – unless you have savings that can be used to pay down the mortgage and reduce the LTV.”
Even if you aren’t in negative equity you could find your options have shrunk. While in September 2007 you could choose between 986 mortgages if you had just 5% of equity in your home, in September 2012 there were just 69. The rates on these loans tend to be much higher than on those for people with bigger deposits. Again, you might choose to move savings to your mortgage to increase your choice.
You borrowed most of the cost of your house
This could put you in the same position as people who have seen the value of their home fall – compounded if that has also happened to you. A few years ago it was possible to borrow 125% of the value of your house on a mortgage – not many did, but it was not uncommon to borrow more than 90%. According to the CML, the average loan to value in 2007 was 90%.
If you did borrow 90% and your home has fallen in value you may find your options are limited. Again Anderson suggests you consider paying off some of the loan. However, he cautions: “[Use] savings that are earning next to nothing in the way of interest but make sure you keep some money back for emergencies, as money overpaid on the mortgage is practically impossible to get back again.”
You are self-employed
If you have recently changed jobs or become self-employed you may not have all the paperwork needed to get a loan. It used to be much easier, but the plethora of self-certification mortgages, which allowed you just to state your earnings is a thing of the past. Now lenders want more proof of your income. Many want at least three years’ accounts, although if you can supply that you will get the same kind of interest rate as an employed borrower.
“If you have less ‘evidence’ than this, you may be able to find a sympathetic lender who will consider only one year’s accounts plus satisfactory account projections,” says Harris. Andrew Montlake of mortgage brokers Coreco says Kent Reliance building society is one lender to try. It underwrites mortgages “from a blank sheet of paper”, he says, instead of asking a would-be borrower to fit into a mould, it will look carefully at one years’ accounts and projections.