Mortgage costs for most are hugely expensive –- a ticking time bomb ready to blight the finances of millions and put the economy at risk. Whether it’s a lack of political will, clout, or ideas, nowt’s being done to stop it.
If you feel a sense of déjà vu over that sentence, don’t worry. It’s not you, it’s me. I first wrote about my fears of a mortgage ticking time bomb in November 2009. Sadly, things aren’t much better now.
We’ve just seen Halifax announce it’s hiking standard variable (SVR) mortgage rates by 0.49%, RBS increase its offset’s rate by 0.25%, the Bank of Ireland reveal it’s hoicking rates by a huge 1.5% and Clydesdale and Yorkshire banks upping rates by 0.36%.
While the change always feels bad, these aren’t the worst. There are other lenders with their SVRs up as high as 6%. It’s easy to think that isn’t such a problem as historically these rates still sound pretty cheap – but look at the bigger picture.
To say UK interest rates are low right now is a bit like saying the phone-hacking scandal caused a small PR issue. Interest rates aren’t low, they’re stuck in a drain, wallowing 1.5% beneath the recorded 200-year historic low.
The Bank of England’s original reason for slashing rates was economic stimulus, yet our nation’s financial arteries are still clogged. The margin lenders now make compared to before base rates plummeted means in real terms some are four percentage points higher than back then.
So let’s have a bit of nerdom and play with the stats.
- October 2008. Base rate: 4.5%. Halifax SVR: 6.5%.
- May 2012. Base rate: 0.5% (I’m assuming it won’t move, though there’s no guarantee). Halifax SVR: 3.99%.
Back then, the Halifax rate was 2% over the base rate. Now it’s 3.49%, a mammoth increase. And this is reflected as a whole:
The average gap over base rate used to be around two percentage points. When rates were first slashed, Government pressure to keep it there was partially successful, but now the gap’s around four percentage points.
However, there have been some minor improvements since I last wrote on this in 2009, at least with new mortgage deals:
- October 2008. Base rate: 4.5%. Cheapest 5-year fix: 5.49%.
- October 2009. Base rate: 0.5%. Cheapest 5-year fix: 4.99%.
- March 2012. Base rate: 0.5%. Cheapest 5-year fix: 3.29%.
However, the gap between base rates and mortgage rates is still far wider than back in 2008. Plus the required loan-to-value ratios have got more stringent, meaning you need far bigger equity in your home to get the hot rates.
Of course, as many will know, fixed rates don’t actually follow base rates. Their funding’s more closely associated with swap rates which, in simple terms, are the City’s view on interest rates over a set period – and they’re depressed at the moment.
Yet it still means whether you’re on an standard variable rate (SVR), or getting a new mortgage, the margins are now much higher than they were pre-crunch for all except those on tracker mortgages, who are still gleefully dancing around their tracker-mortgaged homes.
Even then though, if you’re getting a NEW tracker, they’re now typically three percentage points above base rate (based on the average two-year tracker rate), where once it was half a point or even less.
The underlying problem – evaporating equity
Perhaps far more worrying is how many people are now forced to stick with their SVRs compared with before the base rate cut. This is all about the spectre of what I call evaporating equity. This affliction means you can’t get a new mortgage deal, due to a raft of new factors…
- Tougher LTV limits. Pre-credit crunch, loan-to-value (LTV) ratios of over 100% (borrowing more than your home’s value) were possible and competitive rates were available at 95% LTV. Now to get a good deal, you need to borrow less than 75% of your home’s worth or usually 90% to get any deal at all. This cuts out huge swathes of existing mortgage holders.
- Credit scoring. Credit history is a far bigger part of mortgage acceptability than it used to be. If you’ve had what were once relatively minor problems such as missed payments, you could still be scored out by some mainstream lenders. Of course, for the seriously credit-inflicted, there’s nowt available as sub-prime is (probably thankfully, on the whole) no more.
- Self-employed. Once one of the great feeders of mortgage over-lending was self-certification mortgages, where the self-employed declared sometimes fictional earnings and were lent to based on that. These mortgages barely exist anymore, yet a by-product of the crackdown on this fraud is that it’s much more difficult for the self-employed, especially those without a few years of accountant-provided accounts to get a mortgage.
- House price decline. The ‘value’ bit of LTVs means current house price values. So in the pockets where prices have plummeted, people’s LTVs have worsened. Many who were once in that competitive sub-75% zone aren’t any more.
The paradox is that while mortgage rates have been relatively unresponsive to falling base rates, it’s likely they’ll shoot up, mostly in parallel, when they rise.
Millions are locked into standard rates or high-margin trackers, or are due to be when their current deal ends. So when rates finally turn and start to rise, it’ll be like a smash-and-grab brick through windows.
Imagine the base rate returns to 2008’s historically normal 5% (not a prediction – just a possibility). Someone with a £200,000 interest-only mortgage tracker would see their payment explode from £500 to £1,330 a month.
For many on top of the recession-led financial freeze, that’s catastrophically unaffordable.
Rising bills don’t simply flick back into place like elastic. The pain of increased costs out-balances the joy from when they fell. People have re-jigged their finances around new lower rates and locked into other commitments.
Waiting to administer treatment when rates rise will be too late. This mortgage margin timebomb’s growing now, so we need Government to act. I’ve mentioned this problem over the past few years while giving evidence at parliamentary select committees and said it to MPs. Most seem to acknowledge the issue, but I’m simply not sure anyone (me included) knows what to do about it.
And if nothing happens, that means many must prepare for the possibility of even harder income squeezes.
You can’t bet on any government laying a golden mortgage egg anytime soon. Your best bet is to crack it yourself.
Repay your mortgage with savings. Reducing outstanding debt means you’re less at mercy from mortgage rate rises, and it helps lower your LTV, possibly meaning access to more competitive deals. Plus, it can add up. Someone with a £100,000 mortgage at 4%, overpaying £100 a month, would clear the mortgage 6 years earlier, saving £21,000 in interest (try it yourself using the Mortgage Overpayment Calculator).
Of course, you should check whether you’re allowed to overpay without penalties first. If not, the penalties will usually kibosh any savings. Assuming no penalties, the financial mathematics to decide if it’s worth it are simple. If your after-tax savings rate’s lower than your mortgage rate, pay it off. If you used £1,000 of savings currently earning a decent 2% after-tax to repay a 5% mortgage, then you’re £30 a year up.
If you’ve other more expensive debts, pay those off first. Plus keep an emergency fund, as with most mortgages, overpayments can’t be borrowed back, so ensure you’ve money to keep paying all bills and future mortgage commitments. For more, and a special calculator, see the Should I Repay My Mortgage? guide.
Build a war chest. If you’re on a super-cheap rate now and haven’t got savings, put money aside in case rates rise. This way, you’ll avoid mortgage payment default.
Get a mortgage broker. Once lenders salivated for your business. Now they cover their hands over deals like schoolkids preventing their neighbour copying. So have a mortgage broker on call to speedily grab short-lived deals, preferably one who’s ‘whole-of-market’, meaning it must look at all the mortgages available to it. See the Mortgage Broker guide.
Check the FSA best buy tables. Some lenders deliberately pump out ‘direct only’ deals which can’t be accessed by brokers. They should appear on www.fsa.gov.uk/tables though, so check that and if it looks good, ask your broker to crunch the numbers (see the free Remortgage Guide for more help).