Laura Howard
With the election now over, speculation about the general economy is still rife. But for thousands of British homeowners who have been relying on rock-bottom interest rates to meet their mortgage payments during the recession, a rise in the base rate poses the single biggest threat.
As things stand however, mortgage experts are relatively unfazed by the prospect. David Hollingworth, of broker London & Country, said: “The uncertainty following the election may have an impact on market funding costs and therefore on mortgages, but in the short term interest rates are unlikely to shoot up.”
He added, “That said, I don’t think mortgage costs will improve much either. Especially for borrowers with a large chunk of equity, rates are probably as sharp as they are going to get.”
As things stand
In fact, since the credit crunch, banks and building societies have divided borrowers into two camps – the “haves” and “have-nots”. The “haves” are still in pole position for the very cheapest mortgages. Providing you are armed with between 25% and 40% equity, tracker deals – those that mirror movements in the Bank of England base rate – begin at just 2.39% at the time of writing, while two-year fixed rate deals are available from as little as 2.99%.
At one end of the spectrum is the struggling first-time buyer who, even with a minimum 10% deposit (that’s an average of £16,500), will still be charged top-whack mortgage rates of around 6%.
The difference between these two rates in terms of monthly payments is staggering. For example, a repayment mortgage of £100,000 taken over 25 years and priced at a premium rate of 6% will cost £644 a month. Switching to the cheapest deal on the market at 2.39% will reduce this payment to £443 – a monthly saving of more than £200.
It’s a no-brainer then for older, equity-rich homeowners to take advantage of their position by switching lenders to bag the cheapest deal.
Qualifying for the deal
However, in order to get the green light from a new lender, your income has to be consistent and reliable for the duration of the loan. And if you are approaching retirement age, this can be tricky.
“Lenders look at the age you will be when the mortgage is paid off, rather than the age you are when you apply,” explains Ray Boulger, senior technical manager at broker John Charcol. “The vast majority take 65 as the benchmark retirement age – though if you are self-employed it is assumed you will work longer, so 75 is the usual cut-off point.”
If the loan you are seeking takes you beyond these respective benchmarks, you will have to demonstrate clearly how you will service the loan during those years, says Hollingworth at London & Country. “Lenders have become a lot tougher on maximum ages, so you will need solid evidence of affordability.”
However, under new EU Directive age discrimination laws, lenders are forced to tread carefully – and this means some investigation on their part before a flat refusal. “Cheltenham & Gloucester, for example, will write to your employer and ask if you would be able to work past the age of 65,” says Boulger. “Clearly it would be unreasonable to ask for a guarantee, but if the response is positive, the loan can be taken against your full current salary.”
It’s not only your salary that counts as income either. Private and even state pensions will be taken into account, as well as more solid benefits such as disability allowance – “all of which are more guaranteed than a salary anyway”, says Boulger. Conversely, income from investments is not typically counted.
Bear in mind also that mortgages do not have to be taken over 25 years. The minimum term is around five years, so if you can afford to clear the debt in a shorter time, you may fall inside a lender’s standard criteria anyway.
It’s also worth noting that increases to the minimum retirement ages – up to 65 for women and 68 for men – are very much on the political horizon.
Before you switch
You will have your own considerations when seeking to jump ship from your mortgage lender – for example, any penalties you may incur. “Especially if you have a very small mortgage, you will need to be paying a pretty high rate for it to make sense to cough up early redemption charges,” says Hollingworth.
It may also be that you will revert to a very cheap rate when your current deal expires. You also need to factor in set-up fees when assessing what a new mortgage will save you. Arrangement fees can be as much as £1,000. “The smaller your loan, the less sense it makes to pay high fees to switch,” says Hollingworth, “though some remortgage deals offer free legal fees and valuations.”
If your aim is to “run down” your mortgage until it’s cleared, make sure you opt for a deal to suit. If this is likely to take five years, for example, don’t opt for a two-year fix after which time you will have to reassess the loan. Instead, think about a lifetime tracker that comes with no tie-ins, allowing you to clear debt whenever you are ready at no penalty.
Written by Laura Howard, this article was first published in the June 2010 issue of Saga Magazine. Laura's opinions are her own and for general information only. Always seek independent, professional, financial advice.