The banking landscape has changed a lot over the last few years, and if you have held the same mortgage for a long time, some of the recent mortgage changes could have passed you by. Lenders are a lot stricter about who they are willing to offer mortgages to, and the days of 100% (or higher!) Loan to Value (LTV) mortgages are long gone. When you combine this with house prices that have still not recovered to peak they were at in 2007, it’s easy to imagine how some people could find themselves trapped in an expensive or unfavourable mortgage.
Here is a quick look at some of the most common mortgage switching problems, and how to get around them.
A few years ago, someone who was self-employed could simply apply for a self-certification mortgage. All they had to do was state their income and the lender would be happy to believe it. Today, most lenders want to see at least three years’ worth of certified accounts, or SA302 forms.
Some lenders will accept one year worth of accounts plus detailed projections, so it is worth looking around if you don’t have enough evidence for the main high street lenders. Look for a building society that underwrites mortgages by hand, rather than a lender that will take the attitude of “the computer says no”.
Falling House Prices
Many people are stuck in the negative equity trap because they bought their house with just a small deposit during the housing peak of 2007. Now that house prices have fallen so drastically, the debt left on the mortgage may be higher than the value of the house. Few lenders would allow you to take out a new mortgage with them when you are in negative equity.
The best thing to do in this situation is to just wait for house prices to recover, or, if you can afford to, invest in your home with useful upgrades such as double glazing and UPVC windows or improved central heating that would increase the value of the property. However, if you need to move home soon, you should speak to the lender you are currently with. In many cases, lenders will let existing mortgage holders re-mortgage on to a fixed rate or tracker mortgage. Some lenders will even help you to move house. Not all lenders are sympathetic, but it doesn’t hurt to ask.
Interest Only Loans
When you take out an interest only mortgage, you are supposed to have a plan in place to repay the mortgage at the end of the term. Until recently, lenders would simply ask you what plan you had in place to repay the loan, but they would not check too carefully.
Since the Financial Services Authority turned its eye towards interest only mortgages, lenders have started to be a little more critical about repayment vehicles. Some lenders will only offer interest only mortgages up to 50% LTV, while others have tightened up on the list of repayment vehicles that they accept. If you have no repayment vehicle in place, or have been contributing to one but it is not on the approved list, you could find it difficult to get a new mortgage.
If you find yourself in this position, consider cashing in your investment, and using that money as a deposit on a repayment mortgage.
The above is just a few suggestions for common mortgage issues. Do not treat this as financial advice. Taking out a mortgage is a big decision, and only a trained advisor with a good knowledge of your financial situation can offer you useful advice.