Clare Francis, Site Editor
Thousands of homeowners could struggle to find a new mortgage as the credit crunch tightens its grip on the banking sector. However, there is no need to panic because there are still options available...
Borrowers have received further confirmation that the era of cheap loans is well and truly over. The news will not be warmly welcomed as it could cause problems for thousands of people needing to remortgage.
In an interview with the BBC, Hector Sants, chief executive of the Financial Services Authority, the city regulator, said that banks and building societies will have to change the way they operate as a result of the financial crisis and this will result in a reduction in the amount of credit available and an increase in the cost of loans.
There has been evidence for some time that lenders are becoming more selective with many targeting lower-risk borrowers. Up until now it has only really affected the sub-prime mortgage market, where the cost of loans for those with poor credit ratings has increased sharply, and buy-to-let mortgages: Many lenders are now asking for larger deposits from landlords and some have stopped lending on certain types of property, notably new-build flats.
However, in recent weeks the fall-out has spread to the mainstream market as well with the number of options available to those with little or no deposit having declined considerably. Lenders including Northern Rock, Birmingham Midshires, Abbey, Alliance & Leicester and Scottish Widows Bank have pulled their 100% plus products - these were deals that enabled people to borrow more than a property's value. As such they were popular with first time buyers who had no deposit and no savings to put towards the other costs associated with buying a house such as stamp duty and legal fees.
Royal Bank of Scotland announced it was pulling out of the 100% market - the maximum it will now lend is 95% of a property's value. HSBC also stopped offering 100% mortgages, having pulled out of this part of the market a few months ago. Other lenders have also increased the size of deposit they require.
Cheltenham & Gloucester and Britannia, Barnsley and West Bromwich building societies now demand a deposit of at least 10% of the property's value compared with just 5% previously. And Nationwide has restricted its best rates to those with at least 25% to put down - it will still lend up to 95% but the rates on these deals are less competitive.
What does this mean?
These criteria changes obviously have implications for aspiring first time buyers as there are fewer mortgages available to those with little or no deposit. However, there could also be repercussions for those already on the housing ladder who need to remortgage.
Many of those who bought in the last few years and only had a small deposit, would have been hoping that by the time they came to remortgage house price rises would have increased the amount of equity they had in the property. For most people this will have happened as property prices have risen by an average of 13% over the last two years according to Halifax.
However, national house price data can mask what is happening at a local level. In some regions prices will have risen significantly more than that, while in others they may not have moved at all.
Over the last six months the housing market has slowed significantly and growth is expected to remain subdued over the next few years, with price falls possible in some areas. The latest figure from Nationwide, revealed that prices fell by an average of 0.5% in February taking the annual rate of growth to just 2.7%, down from 4.2% in January.
Consequently, some borrowers may come to remortgage and find that they still have very little equity in their property.
Will I be able to get a new mortgage?
While the choice of mortgages for those with only a small deposit has shrunk, there are still deals available - and some lenders continue to offer 100% mortgages.
Scottish Widows Bank has a five-year fix at 5.89% that is available for loans up to 100%, although it is restricted to professionals only ie. doctors, accountants, solicitors. The fee on this deal is £1,499 although those remortgaging receive a free valuation and free legal work, or £300 cashback.
Another alternative if you need to borrow 100% is from Bristol & West. It is offering a five-year fix at 6.29% with a fee of £499. However, even those remortgaging have to pay the legal fees although a free standard valuation is included. Bristol & West also levies a higher lending charge on loans above 90% - this is effectively an insurance policy that protects the lender in case it has to repossess the property and can only sell it for less than the value of the outstanding debt.
However, if you do have some equity in the property or money in savings and can scrape a deposit together, you will get a better deal. Cumberland building society has a two year fix at 5.20% that is available up to 95%. The fee is £995 although anyone remortgaging receives a free valuation and free legal work.
If you have 10% to put down, Dunfermline building society is offering a two-year fix at 4.79%, with an arrangement fee of £2,499. If you are happy to go for a variable rate, Cheltenham & Gloucester (C&G) has a two-year tracker at 0.46 points under Bank rate, giving a current pay rate of 4.79%. You must pay 2.5% of the loan size to set the loan up although C&G does offer a free valuation and legal work for remortgages.
For more information about the impact the financial crisis is having on the mortgage market check out our latest videoblog, Mortgage woes, or, for tailored advice, call us directly on 0845 345 5705.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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