A BLEAK wider economic picture has made the mortgage market difficult in recent years. Nonetheless, mortgage lending is set to expand by 8.3 per cent in 2013, according to the Council of Mortgage Lenders (CML).
And since the Funding for Lending credit easing scheme was introduced last summer, there has been an increase in the number of mortgage products available. The scheme is due to remain open for the rest of 2013, so now may be the right time to start doing your mortgage homework. As long as there is no major external shock to the market, “it should continue to be a good year for borrowers, especially with the increase in lenders open for business since the credit crunch”, says Bernard Clarke of the CML.
Lenders are gradually starting to offer competitive deals to buyers with smaller deposits, so it may not be worth your while waiting until mortgage rates (possibly) drop further. “When you can get a five-year fix for below 3 per cent, there is only so much further interest rates can fall. Borrowers need to put these rates into a historical context and realise they are great value”, says Mark Harris, chief executive of SPF Private Clients.
A QUICK FIX
The costs of fixed-rate mortgages, in particular, have dropped so low that they may be preferable to the more high-risk, variable rate option. Indeed, whereas customers would previously pay a high premium for the security of fixed-rate, interest rates are at a historical low and unlikely to rise in the foreseeable future. The Co-op, for example, hit headlines last November when it launched its 2.79 per cent five-year fixed-rate.
A comparison website is a good place to start your research, but some of the best buys recommended by SPF Private Clients include the Yorkshire Building Society – which offers a 1.99 per cent two year fix with up to 60 per cent loan-to-value (LTV) and a £995 fee. Or if you’re looking for a tracker mortgage, HSBC provides a 4.69 per cent lifetime tracker (4.19 per cent over base rate for the term) with up to 90 per cent LTV and a £599 fee.
But be cautious when entering into a fixed-rate deal. “It is important not to fix for longer than you are absolutely sure about. You will have to pay a penalty if you want to exit before the end of the fixed period”, warns Harris.
INTEREST VS EQUITY
The financial crisis has made banks reluctant to offer interest-only mortgages, and the FSA is insisting on greater certainty about a borrower’s future plans for repaying the loan. But if you are fortunate enough to fit the criteria for an interest-only mortgage, it can be a tempting option. Harris thinks it especially appropriate for those those with a commission-driven income. Interest-only enables you to reduce monthly payments by paying only the interest, while using any bonuses to pay off chunks of the capital owed on the mortgage. Rather than chipping away at the loan for its term, the interest-only only option means the monthly payments are significantly lower than a repayment mortgage. The obvious downside is that the original debt will need to be repaid at the end of the loan’s term.
Interest-only mortgages may be difficult to come by, but are still an option with some private banks. It may be worth checking whether you meet their criteria.
THINKING OUTSIDE THE BOX
Because many lenders have exited the market since the credit crunch began, borrowers have witnessed a lack of options and variety in the market. But new entrants are injecting some much-needed competition and innovation, giving potential borrowers another avenue to explore. “New entrants stimulate under-supplied areas of the market, like higher LTVs” says Anthony Moody, head of mortgages at Virgin Money. Aldermore Mortgages, in particular, reaches out to those borrowers who may not fit mainstream lending criteria.
If you are able to get the deposit you need, or are looking to climb onto another rung of the property ladder, now could be the perfect time to consult your bank or broker.