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How to switch your mortgage

Paula John
Written By:
Paula John
Posted:
Updated:
16/01/2017

Many mortgage prisoners have been locked into deals with their lender, but is now the time to break free and switch to a cheaper homeloan?

The last eight years have seen the rise of a new type of borrower: the mortgage prisoner. Locked into a deal with their existing lender, many of these borrowers have been caught out by a change in the rules since they originally took out their mortgage. After the credit crunch lenders tightened up their lending criteria massively. They had been accused of being too generous so needed to be careful that they were lending responsibly to those who could pay their loans back. Combined with strict new regulations which came into force last year from the Financial Conduct Authority (FCA), this created a lending environment that is vastly different to that of eight years ago. The result is that borrowers who took out a mortgage before the industry toughened up may find they are unable to remortgage because they simply don’t meet the new lending criteria. What was previously acceptable to lenders is not anymore and if you don’t meet the new rules you can end up stuck on your existing deal – a mortgage prisoner.

There is one reason alone that this hasn’t yet become a huge problem for borrowers: historically low interest rates. Even those stuck on their existing deal have usually been able to afford it while the Bank of England has held rates at their lowest ever level. But the minute rates rise, this inability to switch deals will become a lot more problematic as borrowers become eager to remortgage to the safety of a fixed rate.

However, there is hope for mortgage prisoners, as a combination of market forces and lender flexibility could now offer them the chance to escape to a new deal.

A matter of equity

During the height of the credit crunch in 2009, house prices plummeted in many parts of the country and mortgage lending criteria tightened. Lenders cherry-picked those with the largest deposits of 40 per cent or more for their best rates and anyone with less than that was left with less attractive mortgages. However, lenders have relaxed a bit and many now offer their sweetest deals to borrowers with just 25 per cent equity in their homes, and some deals are now available to those with very little or no equity.

Clearly many more borrowers fall into this category and remortgaging starts to look a lot more attractive when you can actually access a decent deal. This has happened in conjunction with rising house prices in many parts of the UK over the last few years, which means that some borrowers will have gained equity in their homes. This again has opened up more attractive deals and made switching an option for some previous mortgage prisoners.

Not everyone will have benefitted from wider market forces in this way, but for many borrowers who were unable to remortgage a few years ago, it could be worth redoing your sums as it may now be both possible and desirable.

Release the shackles

For every borrower who is no longer a mortgage prisoner, there is another still firmly locked into their deal, as they simply don’t meet the new criteria applied by lenders, regardless of their equity. However the FCA has specifically added a ‘get out’ clause to its new rules, so that lenders can waive the tighter affordability requirements for existing borrowers looking to switch their deal. After all, it seems crazy to tell a borrower that they cannot afford a cheaper mortgage, just because the lending rules have changed. The problem is that not all lenders are using these so-called ‘transitional rules’ to help customers remortgage.

Just a handful of smaller lenders have broken ranks and started to allow mortgage prisoners to transfer over to them, applying the transitional rules in the spirit they were intended. This opens up remortgaging to many who previously thought they were stuck. Mark Harris, chief executive of mortgage broker SPF Private Clients, explains:

“Your lender should apply the transitional rules if you no longer meet its criteria while some lenders will also consider borrowers transferring from other lenders under these arrangements. You may have options; it’s worth finding out as you could save yourself a lot of money.”

Paul Winter, chief executive of Ipswich Building Society, which will waive the affordability rules for mortgage prisoners transferring from other lenders, adds: “There are an estimated 770,000 mortgage prisoners who are stuck on their lender’s Standard Variable Rate (SVR) unable to access a new deal. I believe the sector should consider its responsibilities to existing borrowers who have consistently made their mortgage repayments and would otherwise be classed as good customers.”

Time to switch

If you can get out of your current mortgage, now is a great time to switch to the safety of a low fixed rate. Harris points out:”We are seeing some of the cheapest fixed rate mortgages ever so it is worth considering locking into short-, medium- or even long-term security, depending on your circumstances. Lenders can increase their SVRs on a whim, while a fixed rate will give you protection from rate rises and help with budgeting.

Andrew Montlake, director of advisers Coreco, says: “There has been a lot of talk about the difficulties of remortgaging in the aftermath of new regulations and the extra hoops borrowers now have to jump through, but the reality is that for many now could be the best time to embark on the process.

“Remortgaging is still straightforward and with lenders falling over themselves to get this type of quality business, the rates available are as low as they have ever been. A five-year fixed mortgage rate is currently just above the two per cent level and even 10-year fixes are now around or just below three per cent.

“Even if you are a full-blown mortgage prisoner there may still be hope as a couple of building societies have introduced products to ensure that existing borrowers are not penalised by new rules.”

Not only are fixed rates currently at record lows, mortgage prisoners could have a limited window of opportunity to make their escape. While the UK regulator will allow lenders to waive the new affordability rules in certain cases, new EU regulations coming into force next year may ban this pragmatic approach, meaning mortgage prisoners could find themselves well and truly stuck in a year’s time.

Montlake urges borrowers to consider their options now:

“Whatever your position, it is worth checking what is available for you this year before this legislation takes effect. In addition, it makes sense to lock in to the current crop of historically low fixed rate products to ease any future sleepless nights when interest rates do inevitably rise.

Be prepared

Remortgaging used to be a relatively quick process, but if you haven’t taken out a new deal for a while be prepared that it now takes longer. Strict new rules came into force in April 2014 which force lenders to check that you can not only afford to repay your mortgage now, but also if interest rates were to rise. This means they spend a lot more time assessing your finances and the affordability of your mortgage. To ensure the process goes as quickly as possible you should gather all your relevant financial information before you visit a potential lender, either online, over the phone or in a branch. This includes (for you and any joint buyers):

Personal details: Address and previous addresses over the last three years

National Insurance number

Income details including last three payslips

Bank statements for last three months

Details of direct debits, standing orders and other regular outgoings

Proof of any State benefits you receive

Your P60 form, or if self-employed your last three years’ accounts plus projections for the year ahead and SA302 forms

How much you typically spend each month on childcare, utilities, food, going out, and mobile phone bills

Details of any other properties you own or mortgages you have (such as a buy-to-let mortgage)

Current balance of any loans, credit cards or overdrafts

Any insurance policies you hold.


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