Held again in July at 0.5%, the Bank of England base rate has now been bumping along the floor since March. You'd expect such an environment to be every borrower's dream, but unfortunately for many trying to get a mortgage it's anything but.
Sign of the times
Don't forget why interest rates are so low - the Government and Bank of England are battling to pull the economy out of recession and recover from the hangover of the financial crisis. One of the symptoms of this has been the battening down of hatches among mortgage lenders - all nervously trying to guard their capital and reduce risk.
In other words, while in theory now would be a great time to be paying a mortgage, in practice borrowers are continuing to be shown the red light by lenders. Research carried out here at moneysupermarket.com, showed there are just 2,282 different mortgage deals now available on the market. This compares to 5,040 this time last year, and an astonishing 27,962 in the pre-crunch days of July 2007.
Who's most affected?
The most obvious victims of lenders' reluctance to part with their cash are those trying to get on the housing ladder. Whereas just a few years ago, first-timers could borrow 100% or even more of the property value, these days they will be lucky to get 90%. Even then your credit rating will need to be nothing short of exemplary if you are to have any hope of getting a mortgage. And if you do succeed you'll need to brace yourself for some of the most expensive mortgage deals on the market as the leading rates are only available to those with larger deposits - often at least 25% but in some cases lenders are asking for deposits of at least 40%.
It's not only first time buyers being hit
Many existing homeowners are finding it increasingly difficult to remortgage when their current deal comes to an end. With the downturn in the housing market having wiped more than 20% off the value of their homes, many have seen the equity stake they have in their property shrink which is affecting their ability to get a new mortgage because they need to borrow a higher proportion of the property's value.
In some instances, the outstanding mortgage is greater than the value of the property, leaving homeowners stuck - negative equity. However, as long as you can meet your monthly mortgage repayments and aren't looking to move, this isn't necessarily a huge problem: you may not be able to get a new mortgage, but you can continue with your existing loan although you might have to pay a higher rate once the introductory fixed or discounted period ends.
Lack of support for those needing help
The amount of equity you have in your home doesn't only affect your ability to get a new mortgage it can also have an impact on those looking to their lender for some help during these tough times of recession and rising unemployment. Many lenders claim to offer payment holidays to borrowers, which can be useful if you're struggling to meet your monthly mortgage payment, perhaps because you've lost your job. A payment holiday is when the lender agrees to you stopping your mortgage payments for a few months or paying a lesser amount. However, some borrowers are having such requests turned down because of a lack of equity in their home.
Conservative valuations
Another big problem people are coming up against is that mortgage lenders are valuing many properties for less than the borrower was expecting.
Even if you are just looking to remortgage your existing home, a lender will require a valuation surveyor before making a decision on how much it is prepared to lend. But with house prices falling, many are using very conservative valuations.
Louise Cuming, mortgage expert at moneysupermarket.com, said: "A lender's valuation will be considerably lower than what a property might sell for on the open market. This is because a sale is a proved valuation - someone has actually paid the money for the home. When it comes to a valuation for remortgage for remortgage purposes, it will be based on what they think could be achieved at a forced sale in a timeframe of around three months".
Cuming adds that, while this valuation disparity is nothing new, it's certainly more relevant and is therefore "catching a lot of borrowers out." So how can you prepare?
What can you do?
- The first thing to do is to establish an idea of what your home might be worth. Check with the Land Registry to see what similar properties in your area have recently sold for and look in estate agents' windows to see what price similar flats or houses are currently on the market for (although bear in mind that the asking price could well be higher than the price it actually sells for). Factor in an inevitable conservative angle from your mortgage lender and then note down the range of prices you are expecting to hear.
- It might also be worth asking a local estate agent to visit and give a free valuation - though bear in mind this will be based on a marketing price.
- You will have to do your sums carefully, but making some of the most essential home improvements such as double glazing or central heating and sprucing up the kitchen or bathroom, could give the value of your home the edge you need to qualify for the best deals.
- This is because, in their cautiousness, lenders are moving away from so-called desktop valuations (where just data is used to confirm the value of a home) and are sending valuers round in person instead, says Cuming. "In this case home improvements are more likely to be recognised. For the same reason, it's also worth keeping your home well-maintained. In a market where the odds may seem stacked against you, at least you'll be well placed to achieve the best valuation".
- For more advice on maximising the value of your home, read 'Sarah Beeny's tips for buyers and sellers'.
- Make overpayments on your mortgage. If you are struggling to get a mortgage because you don't have enough equity in your home, look to build up your stake as quickly as possible.
- You can't rely on rising house prices at the moment. However, if you can afford to, pay a bit extra off your mortgage each month - most lenders let you do this although you may be restricted as to the amount you can overpay by without penalty. Often it is capped at 10% per year, so check with your mortgage provider beforehand.
- Use savings. If you have money in savings, consider using some of it to increase the equity you have in your home. You need to be careful though as it's always advisable to have easy access to some savings in case you lose your job, or incur an unexpected expense such as needing a new boiler.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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