With interest rates currently at highs not seen since the early 90s, those who took fixed-rate mortgage deals in recent years now seem to have been spoiled by the low rates offered in recent years. The Royal Institution for Chartered Surveyors (RICS), estimate that the party is about to end for 1.5 million homeowners, whose fixed rate deals will end in 2008.
Those having to take out new mortgages will find themselves paying substantially more than you have been for the past few years. The best five-year fixed rates currently available are over 5.5% , but back in 2003 it was possible to pick up a deal for 3.75%, or sometimes even less. So today's rates are up to 35% higher than five years ago and this will cause a hefty jump in your monthly repayments. This is because the cost of short-term borrowing has shot up on the international money markets. In addition, the banks and building societies are now adopting much tighter lending rules when it comes to mortgages, loans and credit cards.
The majority of lenders have now become incredibly choosy about who they lend to, and how much they're prepared to hand out. If you don't have a squeaky clean credit history you could find it hard to secure a competitive deal, or simply end up paying more. Many lenders will only offer people they perceive to be 'higher risk' borrowers their higher, variable rate deals. And you can forget grossly exaggerated loan-to-income lending altogether. The days of 125% mortgages are well and truly over. Well, for now at least.
The market analysts such as the RICS worry that this could have a seriously detrimental impact on the entire housing market. These experts say the signs of a meltdown are already visible in some quarters. This is because many of those who stretched themselves to a larger mortgage five years ago are now finding that the rising payment rates on current deals go beyond their original budget.
The Royal Institution of Chartered Surveyors says it has seen the number of repossessed properties rise by around 20% in the past year, as homeowners have struggled to service their mortgages following last year's interest rate hikes and tougher refinancing conditions. This worrying trend is forecasted to continue with the number of repossessions potentially increase by a further 50% in 2008.
So if you are facing a re-mortgage situation, what can you do? The biggest problem with fixed rate mortgages is that lenders know they are popular because they offer long-term security, which is valuable in this uncertain climate. This has made one of the biggest drawbacks with the new credit crunch 'era' of fixed-rate mortgages, aside from the fact that deals will now typically be significantly higher than a few years back is that the fees associated with them have become ridiculously high.
According to research from Moneyfacts.co.uk, the average mortgage arrangement fee has almost doubled during the last two years. Mortgage fees of £1,000, or even as much as 2% of the sum borrowed, are now commonplace and they add significantly to the cost of borrowing. In Particular when the fee is added to the balance of the mortgage and paid off over 20 years or more.
This makes long term deals more attractive. In the past it has been impossible to find such deals at fixed rates for longer than five years, but times are changing. Chancellor Alistair Darling, in his first Budget Speech, earlier this month, raised the possibility of a shift towards 10, 20, even 25-year fixed rate mortgages as a way to create a feeling of stability and certainty in the property market.
It is still early days for these offers and many are enticing customers, such as in the case of Cheshire Building Society’s 25-year fixed rate plan, with a get-out clause after four years which is penalty free. These deals are intended to inspire confidence in the market, and as such should be more competitive than comparative short term plans. If you need to re-mortgage these schemes could save you a small fortune in changing fees.
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