Remortgage Fears Wednesday, 27th May 2009

Tighter lending criteria mean that homeowners may struggle to remortgage, according to some experts. Millions of homeowners with mortgage deals that expire over the next year are in for a horrible shock.

Fears are growing of a sharp rise in defaults and home repossessions when the Bank of England begins to increase the cost of borrowing as the economy recovers.Economists forecast that interest rates will rise as early as next year; any increase is likely to be passed on quickly by lenders in the form of higher SVRs.

While interest rates are low, borrowers will be fine to sit on SVRs but once rates start to rise, which are expected to happen next year, payments could become unaffordable and lead to repossession for those who can’t cope.

With a £150,000 interest-only mortgage on the current average SVR of 4.61 per cent, a borrower is paying £576 a month. But if interest rates rise by 2 percentage points over the next 18 months, as some economists expect, monthly repayments will increase by £250, or £3,000 over the course of the year. A rise of 4 points, predicted by 2012, will lead to repayments soaring by £5,000 a year.

The chronic shortage of mortgage funding means that borrowers with even the slightest question mark over their financial or employment history are being rejected for new deals.The restrictions are unlikely to ease over the next year as banks continue to pick and choose the best borrowers. However, there are nearly 4 million who have seen their wages cut, face redundancy, have moved frequently, are self-employed, or face high levels of debt.

A further one million borrowers are in negative equity, according to the Council of Mortgage Lenders (CML). These borrowers, who are trapped with a home loan that is worth more than the value of their property, will find it impossible to secure a new mortgage deal from most lenders.

Another 1.3 million homeowners are considered bad risk because they have missed mortgage payments or credit card bills, have been repossessed, or were given a county court judgment.

And, this group is set to double over the next 12 months as unemployment passes three million. At least half a million borrowers will be three months in arrears by the end of the year, according to the CML.

Mortgages for borrowers considered credit-impaired have vanished from the market in the past two years. At the peak of the housing boom, there were more than 7,000 mortgage deals for borrowers with less than perfect credit histories.Another group of borrowers who will struggle to secure mortgage finance are those with a self-certification mortgage.Matt Andrews, of MoneyWorkout, the broker, says: “Without proving their income, families were allowed to stretch to a slightly larger property by securing a mortgage outside their income capability.