Big changes are afoot in the mortgage market, with a set of new rules on affordability due to come into force in April. Would-be borrowers will have to go through tougher checks, and show that they can still afford to make monthly repayments on their loan if interest rates leap up. The changes, which follow the City regulator's Mortgage Market Review, are designed to prevent a return to the unsustainable borrowing seen in the run-up to the financial crash.
Self-certification mortgages are out, with borrowers having to show plenty of paperwork to prove their income, while stress tests are in. In addition, anyone who wants an interest-only mortgage will have to convince the lender they have a credible plan to repay it.
In the short term the changes could have an impact on mortgage rates, as lenders that are trying to bed in new systems decline to appear at the top of best-buy tables to limit the number of applications they receive.
The good new for borrowers unable to remortgage because they have an interest-only deal or self-certification loan is that lenders have been told to treat exisiting customers fairly, and to offer them competitive rates even if they would no longer qualify for a loan.
Rates on new mortgages are expected to march up this year, despite Bank of
First-time buyers and people wanting to remortgage are being warned to act now to secure the best deal. "The danger of headlines such as 'Low mortgage rates for years' is that it can lull some borrowers into a false sense of security," says
Last week the Bank indicated the base rate would stay at its historic low of 0.5% until at least 2015, bringing relief to those on tracker mortgages and other deals linked to it. However, other rates are set at lenders' discretion, including many standard variable rates for existing customers, and new deals for customers who are buying or remortgaging.
Behind the predictions are a cocktail of factors making borrowing more expensive - even if Carney keeps a lid on the base rate. Funding for Lending - the government's flagship scheme to encourage banks to lend more - has helped finance billions of pounds worth of mortgages. But it was partially withdrawn at the end of January, with the government aiming to divert lending to small business rather than households.
Meanwhile, April will see the start of tighter lending criteria, as the long-awaited Mortgage Market Review (see box) comes into force.
According to the Bank of
On two-year fixed-rate deals there have been few changes, and buyers can find rates below 2% if they have a deposit of at least 30%. Tesco bucked the trend by putting up some of its two-year fixed rates at the same time as cutting the cost of its five-year fixes, but it still has two two-year deals priced at 1.64% and 1.99%, at maximum loans to value of 60% and 70% respectively. While these deals might bring lower monthly repayments than five-year fixes, it is worth bearing in mind that you could find yourself shopping round for your next mortgage at a time when rates have started to rise across the market.
Last year the regulator, the
Brokers said those sitting on cheap deals linked to the base rate could take comfort from the Bank's words, but should still plan ahead. Hollingworth said: "They, too, can take action now. Making overpayments whilst rates remain at this low will reduce the mortgage balance more rapidly and make life easier when rates do start to climb."
A five-year fix will protect you if interest rates start to go through the roof. Alamy
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