by Mark Johnston
Home owners who are finding it difficult to sell their homes aren’t the only ones who are starting to worry about falling house prices. Home owners looking to remortgage rather than sell their homes may well find themselves in hot water due to falling house prices.
When house prices fall, home owners loose equity in their own properties. When they then come to remortgage their home they may end up paying higher interest rates as banks and building societies only offer the lowest rates to those with the most equity or largest deposits. Some lenders almost double their rates for those with only 20% equity compared to those with 40% and more.
Following the financial crisis, lenders tightened up their lending criteria by moving away from more riskier borrowers. First time buyers and those with small deposits were looked upon as more risky so banks charged them more. The higher the loan to value of a mortgage, the higher the rate of interest. But now, as a result of falling house prices, home owners who aren’t necessarily high risk are not being pushed into this category and charged a higher rate of interest
David Hollingworth a mortgage broker at London & Country said: “The problem is particularly acute for those teetering on the edge of one of the loan-to-value bandings. These home owners could find their choice of rate adversely affected by even small fluctuations in house prices over the coming year.”
An example of how falling house prices can effect even those not looking to sell their home can be seen when looked at some of the Halifax’s mortgage rates. Their two year fixed rate mortgage costs just 2.99% for those with 40% equity in their homes. If a home owner looses just a few percent equity in their home due to falling house prices, then they would only qualify for the 6.04% fixed rate mortgage which has a loan to value of 85%. In terms of monthly repayments, a £150,000 mortgage on the 2.99% mortgage would cost around £417 whilst the 6.04% home loan would cost more than double at £977.
Melanie Bien, a director of mortgage broker Private Finance said: “Lenders are applying the same pricing differentials on variable-rate mortgages too. For tracker mortgages, those with the most equity in their home will get the most competitive rates. Roughly speaking, for every 5pc increase in LTV, borrowers will pay an extra 0.5 percentage points on the rate.”
Borrowers that are close to the thresholds are the ones most at risk. Even a slight drop in home valuation might double monthly repayments. Those who have seen a large amount of the value of their property wiped in recent months are worst affected. Those with around 90% loan to value in their home could see their home fall in value further. If this happened they may be in danger of not being able to remortgage at all.
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