New Year, New Mortgage?

by Mark Johnston

2010 has been a tough year for borrowers, home owners and home buyers alike. The financial crisis has hit homes and families up and down the country as the government’s comprehensive spending review started to bite.

The troubled UK housing market has seen prices fall for most of the year due to fewer and fewer buyers getting home loans. It’s not that first time buyers aren’t looking, banks and building societies have been tightening their lending criteria to reduce the risk of another financial crisis. The tougher new criteria has resulted in a record low figures in agreed mortgages which has put further pressure on the housing market.

In the last few months there have been many reports of a rise in the bank of England base rate. But with the rate still at 0.5%, there is probably just as much chance of the rate remaining at 0.5% for the whole of 2011 as there is of a small rise to 1%.

With the very real possibility of a base rate increase borrowers are starting to look at fixed rate deals. With swap rates on the increase, lenders are warning that prices may start to increase even if the base rate remains at its current level.

With this in mind it’s probably worth checking out those fixed rate deals pretty quickly before prices start to go up. Anyone considering a fixed rate mortgage should act quickly to get the best deal although it’s worth remembering that base rates will probably remain low even if the rate does increase.

There are still thousands of borrowers on standard variable rates who are open to increases in their monthly repayments. It’s hard to say whether it’s worth fixing mortgage borrowing right away as its impossible to say when rates will increase and to what extent. That said, any borrowers with more than 25% equity in their home should be able to get a better deal especially if they are on a standard variable rate (SVR) of more than 3%.

Those who are on a even higher standard variable rate of between 4.% and 6% can find a better deal even if they only have a smaller amount of equity of say 15% of the value of their home or more.

The advice all along has been to use the extra money to pay off more of the mortgage debt but this hasn’t always been listened to by many. Those that have done will probably be ok when rates increase, although they will have less spare income, they will be least effected.

Borrowers who are struggling now should really be thinking about fixing their mortgage although this usually means paying more out per month. The first thing borrowers should be is find out what mortgage they are on and how much their interest rate is. This seems fairly obviously but well over half of all borrowers don’t know this basic information.

Borrowers should then use online mortgage payment calculators to work out how much they would be paying if rates go up by 1%. It’s then easy to see what a small increase of 1% would mean to monthly repayments. This is a great exercise to complete in order to understand what impact base rate changes would have.

Any borrowers who cannot sustain even modest rate changes should look to find a fixed rate mortgage now. There are some great offers out there at the moment. Its worth shopping around and seeing what’s available direct from lenders as well as seeing what a mortgage broker can offer.

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