Hundreds of thousands of homeowners coming off tracker deals with rock-bottom interest rates face a sharp rise in monthly repayments despite a series of competitive deals introduced this week.
In 2007 mortgage lenders were offering two-year tracker deals with interest rates pegged below the base rate. When the Bank of England cut the cost of borrowing from 5 per cent to 0.5 per cent in six months, households were celebrating as their repayments fell by hundreds of pounds a month. Some lucky borrowers had their interest rates falling to zero.
Repayments for borrowers with a £150,000 interest-only mortgage on a rate pegged at half a point below base have fallen to zero. Those on a capital repayment deal enjoyed a drop from £842 to £500 a month. However, over the next three months homeowners’ repayments will jump as their deals end and revert to their lenders’ standard variable rates (SVRs) or they remortgage on new, pricier home loans.
Customers who took out a deal with Cheltenham & Gloucester (C&G), owned by Lloyds Banking Group, and Nationwide Building Society will be moving on to an SVR of 2.5 per cent, one of the lowest on the high street.
The shock will be worse for borrowers with other lenders. Monthly repayments on a £150,000 loan from Bank of Scotland, which has an SVR of 4.84 per cent, would leap from zero to £605 on an interest-only deal, or from £500 to £872 if the borrower is making capital repayments.
Advertisement
Mark Harris, of the broker Savills Private Finance, says: “If you are coming off these rates, you are in for a nasty shock. You will need to plan in advance and consider your options carefully. It could be cheaper to revert to an SVR than remortgage on to a new deal.”
Landlords with buy-to-let loans from Bradford & Bingley were sent letters encouraging them to remortgage elsewhere because the government-owned lender has been trying to reduce the size of its mortgage book. It offered to waive early repayment charges for those who remortgage elsewhere before their deals expire, without clearly indicating that if borrowers had remained with the lender they would have moved to an extremely low SVR.
Mr Harris says: “It is important to get out your paperwork and find out what rate you will be reverting to. If your lender’s SVR is low, it could pay to stay put for the time being. Other borrowers will need to do their research.”
This week HSBC introduced a new discounted deal pegged at 1.95 percentage points below its SVR of 3.94 per cent, giving a pay rate of 1.99 per cent — the cheapest mortgage it has ever offered to new customers. The deal, which has a fee of £1,199, is available only up to 60 per cent loan-to-value (LTV) and brokers warn that only borrowers with a perfect credit history should apply.
There are also concerns that the headline-grabbling rate could result in a long wait for applications to be processed. David Hollingworth, of London & Country Mortgages, another broker, says: “HSBC has offered a number of competitive rates recently and there are question marks over its service levels. We have seen clients who have been forced to wait months for a decision, only to be turned down.”
Advertisement
An increasing number of homeowners are opting for tracker deals, which are pegged to the base rate. HSBC has a best-buy tracker at 2.49 points above base, or 2.99 per cent. It is available to homeowners who need to borrow up to 75 per cent of the value of their home.
C&G, Halifax and Woolwich, which is owned by Barclays, cut fixed rates this week. Fixes remain the most popular deal for homeowners looking for set monthly payments. The best-buy two-year fix is from NatWest, at 3.69 per cent on LTV ratios up to 75 per cent, with a £799 fee. The most competitive five-year deal is from HSBC, with a rate of 4.95 per cent, available up to 60 per cent LTV. It has a £999 fee.
However, homeowners whose property values have slumped could have no choice but to revert to an SVR. House prices have fallen 25 per cent since 2007 and some homeowners may find that their LTV ratios have risen sharply, excluding them from the best-buy deals. A £150,000 loan on a £200,000 home has an LTV ratio of 75 per cent. After a 25 per cent drop in the property’s price, the loan will have an LTV ratio of 100 per cent and it would be impossible to secure a mortgage. The best offer on 90 per cent LTV is from HSBC. It is a discounted deal at 3.69 per cent.
The most competitive fixed rate available up to 90 per cent LTV is also from HSBC, at 5.99 per cent.
Lenders ‘blacklist’ certain professions
Advertisement
Homeowners have been warned that mortgage applications could be rejected if it is known that their employers are planning rendundancies — even if their own jobs are secure.
It is the latest blow for borrowers struggling to secure a new deal from banks and building societies. Ray Boulger, of John Charcol, the broker, says: “Applications from employees of companies planning wide-scale redundancies have been rejected by lenders. It is certainly now a factor for underwriters when considering a new mortgage application.”
Unemployment in the UK, which is currently about 2.4 million, is expected to soar past three million by the end of the year as thousands of companies lay off staff.
Andrew Montlake, of Coreco, the broker, says: “Lenders are looking at the bigger picture and taking into account outside factors that they never used to consider.”
Potential redundancies are not the only job-related cause of rejection. Certain lenders hold “blacklists” of jobs considered at risk. Anyone in one of these jobs will find it almost impossible to secure a loan from these lenders. Others impose strict rules on how much certain workers can borrow.
Advertisement
Those working in the property industry face a battle to secure a new deal. Late last year it emerged that Royal Bank of Scotland would not consider applications from borrowers who took 30 per cent or more of their income from the property market. Other lenders have since followed and cut lending to property professionals.
Almost every mainstream lender has also tightened the rules on bonuses and commissions, making it much harder for workers who depend on the extra cash to make up their salary. Nationwide and Woolwich, the mortgage brand of Barclays, are among the lenders that will now accept only a small part of bonus income as annual salary. Nationwide will take only 50 per cent of bonuses from the past year when considering how much a customer can borrow, reduced from 100 per cent previously.
Mr Montlake says: “In the current climate it is unlikely that bonuses will be as generous, so mortgage lenders are being more conservative.”