Research we've carried out at moneysupermarket.com shows that despite the fact the Bank of England has slashed interest rates from 5% to 3% in the past six weeks, new customers continue to be stung as the margin between Bank rate and the leading mortgage deals widens.
What's happening?
Since the onset of the credit crunch, lenders have struggled to raise funds for mortgages and wholesale borrowing costs remain much higher than the country's official interest rate. The problem is being compounded by falling house prices and the recession, which means that banks and building societies are reluctant to lend to those with small deposits in case they are forced to repossess homes and have to sell them for less than the outstanding mortgage.
As a result, mortgage rates are much higher, relative to the Bank of England's base rate than they were 18 months ago. In May 2007, the leading two-year tracker rate was 0.76 points below Bank rate - anyone with that deal will be paying 2.24% following this month's rate cut. Now however, the leading two-year tracker, which is from Cheltenham & Gloucester (C&G), is 1.79 points above Bank rate, giving a current pay rate of 4.79%, costing someone with a £150,000 25-year repayment mortgage an extra £205 a month.
Those preferring a longer term deal, could have taken advantage of a lifetime tracker at 0.18 points above Bank rate in May last year, but the best you can get now is a deal from HSBC at 3.99% - 0.99 percentage points higher than Bank rate.
The other major problem is that many deals are only available to those with at least 25% to put down (in some instances lenders require 40%). This compares with the pre-credit crunch era when loans of up to 90% and 95% of the property's value were readily available and you could even get a mortgage if you had no deposit at all. The current environment means that many aspiring first time buyers are precluded from getting a mortgage because they don't have a big enough deposit. And because of falling house prices, many of those who bought in the last year or two with little or no deposit, and who are coming to the end of their current mortgage deal are struggling to get a new mortgage because they don't have much equity in their home.
What should people do?
First time buyers:
Sit and wait
If you're trying to get on to the housing ladder but are finding it hard to get a mortgage because you don't have a big enough deposit, bide your time and keep saving. While the shortage of first time buyers is not helping the housing market, at least you don't have to worry that you'll be priced out of the market if you don't buy now.
Existing home owners:
Don't rule out fixed rates
With interest rates falling and further cuts on the way, a variable rate mortgage may seem like the obvious option - but don't overlook fixed rates.
Even though trackers are directly linked to Bank rate, some lenders impose a 'collar' which means that if the rate falls below a certain level (often 3%) rate reductions may not be passed on. Many borrowers may therefore find that they don't benefit even if interest rates carry on falling.
As with trackers, the margin between Bank rate and fixed rate mortgages has widened, but you can lock your mortgage payments at a lower level than you could last year. Abbey has the leading two-year fix at 4.49%, compared with 5.69% in November 2007. (Principality Building Society is offering a rate of 3.99% but there is a whopping 4.5% fee - £6,750 for someone borrowing £150,000 - so it is unlikely to offer best value. Abbey's fee is £995.)
The leading five-year fix is from C&G at 4.89%, with a £1,094 arrangement fee. Both the Abbey and C&G products require a deposit of at least 40%.
There's no need to panic
If your current mortgage deal is about to end but you are worried that you won't be able to remortgage because you don't have much equity in your home, do not panic. Speak to a mortgage broker to find out what options are available to you and if you don't currently qualify for any of the mortgage products on the market, all is not lost.
Most deals switch to the lender's standard variable rate (SVR), or a higher rate linked to Bank rate, once the fixed or discounted period ends so you will not suddenly find yourself without a mortgage. As long as you've been keeping up with your monthly payments and have not broken the terms and conditions of your mortgage agreement, all that will happen is you will move on to that higher rate. And the good news is that in many instances these 'go-to' rates are coming down because of the recent interest rate cuts.
SVRs should fall from about 7% to around 5.5% if lenders pass on the latest 1.5% rate cut which is actually not that much higher than the leading mortgage rates available at the moment. And one advantage of being on an SVR is that you probably won't be tied in, so as and when the mortgage market opens up again and you have adequate equity in your home, you will be able to move on to a new deal without being hit with a penalty.
Build up equity
If falling house prices mean the amount of equity in your home hasn't increased as you'd expected and you want to remortgage, look for other options: do you have any money in savings which you could use so you have a bigger deposit, or are there any home improvements that could be made (cheaply) which would add value to your property?
Protect your payments
With the Bank of England having confirmed that the economy is in recession and unemployment rising, think about what would happen if you were to lose your job - would you be able to afford your mortgage payments? If you wouldn't, consider taking out mortgage payment protection - this will cover your mortgage payments, and give some peace of mind, if you found yourself unable to work due to accident, sickness or unemployment. To find out more, check out our MPPI comparison tool.
Speak to your lender
If you are falling behind with your mortgage payments or are worried that you won't be able to keep up with them for much longer, speak to your lender as soon as possible. You may be able to negotiate lower repayments or a payment holiday to tide you through the difficult patch. If you do nothing, you risk having your home repossessed.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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