Page last updated at 23:12 GMT, Tuesday, 15 July 2008 00:12 UK

New challenges with remortgaging

Money Talk
By Peter McGahan
Independent Financial Adviser,

Peter McGahan
Peter McGahan says people should study a mortgage deal in its entirety

The last few years have seen a massive increase in borrowing, and that has eventually taken its toll, with lenders being squeezed over who they can lend to.

If you are remortgaging today, you will face a new set of challenges.

Properties are being down-valued, and as such the percentage you can borrow against the value of your house - the loan-to-value (LTV) - may be less than it was before, meaning that you may not even be able to remortgage.

You would then be stuck with your current lender, and in turn their uncompetitive rates.

All the general criteria lenders use to decide who to lend to have tightened up, and competition has virtually disappeared, so there are fewer options available to you.

Cost of borrowing

Many lenders have not passed on April's interest rate cut from the Bank of England and most banks are reluctant to lend money.

Marry all this with a slowing economy and soaring inflation, and the only short-term direction for the cost of borrowing is up.

The poor borrower is caught between a rock and a hard place in determining whether or not they should take a fixed-rate, or a variable rate, and ride out the short-term storm.

Ensure you look at any mortgage package in its entirety. The rate is just one part of it and other add-on fees could prove expensive.

Perhaps the biggest issue is for the person coming off a fixed rate from two years ago.

If they are forced onto a standard variable rate, they may see payments rocket by up to 64%. Even if they are offered the best two year fixed rate, they will face a deal 35% more expensive than the one they are currently on.

Those who took out a mortgage with a loan-to-value over 90% may also find it tricky to remortgage, along with those who have a high multiple of income as the criteria have tightened so much.

However, if you think you are having a tough time, consider all those people who borrowed over 100%. There are some banks that offered mortgages as high as 125% LTV.

If the last downturn is a pointer, the next time these poor borrowers see positive equity they are likely to have a different hair colour.

They will be seen as a high-risk and no lender is going to want to take them, which means their existing lender can have a field day with their chargeable rates.

Tips for homeowners

There are solutions, however. If you are in need of a remortgage, there are some things to consider.

The cost of mortgage deals has risen and availability has dropped

Until six months ago, anyone could arrange a mortgage, but today it is the job of a seasoned professional who specialises in mortgages.

Nationwide announced recently that they are now moving to quality rather than quantity in deciding which mortgage advisers they work with.

A specialist Independent Financial Adviser (IFA) will know exactly how to position your case with a lender and will invariably have clout because of their buying power.

A fee-charging IFA is a better option as some lenders don't pay commission, and a financial adviser not charging a fee may be less likely to use them as they will not get paid.

Ensure you look at any mortgage package in its entirety. The rate is just one part of it and other add-on fees could prove expensive. They are often added onto the loan, and whilst that is less painful, it all adds up.

Watch out for being tied into your mortgage beyond the normal term at a higher rate. It is a common ploy that catches many people out. Also, if you find a good deal, act quickly, as rates are disappearing almost as they appear.

Ask your IFA to negotiate with your existing bank. A good fish that's getting away is more attractive to a fisherman than the cost of finding another.

Priority bills

If you can't afford payments, act straight away. You will feel better for it.

Your lender will be happy to help and will discuss all the options available. They have a requirement to treat you fairly, so give them a chance to do that.

If you have a repayment mortgage, look to switching onto an interest-only for the time being to give you some space. Ask your IFA before doing this as sometimes lenders will charge a fee.

Do a budget planner. Stop unnecessary payments. Pay the important bills first, not those who shout loudest.

The priority bills are those from people who can take legal action such as any loan secured against your house, rent, council tax, water, gas, electricity, unpaid fines, hire purchase, and of course your phone if you are reliant upon it.

Most other bills are not priority and you should simply communicate with them.

The Citizens Advice Bureau is a great help, is independent and should be used before paying large fees elsewhere.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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