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125% Remortgage-The ‘Lesser of two evils’
Darren Cook, mortgage expert at Moneyfacts.co.uk, comments:
“In previous years many people have struggled to get onto the housing ladder because of high house prices and earnings not matching up. Lenders recognised this demand and one of the ways they tried to assist borrowers was by designing and offering mortgages in excess of 100% LTV. The intended plan was that you buy a property that’s in need of refurbishment at a cheaper price, renovate the property and in turn increase the property’s value.
“Unfortunately the credit crunch has seen property values either stagnate or in many areas fall. As a result lenders have stopped offering 100% plus mortgages because they are deemed to be too risky in the current economic climate, resulting in many borrowers who took out these deals two years ago finding it impossible to find similar new deals.
“Such borrowers have not had time to accrue enough equity in their homes and with more and more lenders reducing the maximum LTV on their entire ranges and 90% LTV becoming the norm borrowers’ options are becoming severely restricted.
So what can they do?
“These borrowers only really have two options: they can continue with the current term of their mortgage at their lender’s SVR, or they may choose to move the unsecured element of the debt to an unsecured personal loan and then move the remaining secured debt to a more competitive deal with a lower LTV.
“Two years ago borrowers looking for a 125% LTV product could have approached Northern Rock and been offered a rate of 6.19% until 1/6/08 with a £695 fee. 30% of the debt would have been unsecured with the remaining 95% being secured against the property. On a £150,000 mortgage, the borrower would have been repaying £983.95 per month.
“If the above scenarios were adopted, then the new repayments would be as follow:
|
£150K transferred to SVR |
£135K transferred to most competitive 2 year fixed mortgage deal* plus £15K transferred to unsecured loan** |
Secured loan monthly repayment |
£1,141.13 |
£882.88 |
Unsecured loan monthly repayment |
N/A |
£294.84 |
New total monthly repayment |
£1,141.13 |
£1,177.22 |
*Loughborough BS - 5.75%, 90% LTV with £649 fee |
||
“The difference between the two options is £36.59 per month; however the increase from what they were initially paying is up to a staggering £157.18 per month. This would mean they would need to find an additional £1,886.16 over a year at these interest rates.
“Many of these borrowers would have stretched their budget in order to afford the original deal and are likely to struggle with such an increase, particularly with other household debts increasing at the same time.
“These borrowers are in for worrying times. However, lenders should understand the difficulties people are finding themselves in and allowing the case to get to a repossession stage is not in anyone’s interest. People who might find themselves in a worrying situation like this should first contact their current lender and explain their circumstances before the situation becomes irreversible. The likelihood is that both parties should come to a mutually acceptable agreement that will benefit both for the way forward.”
Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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