Remortgaging in a credit crunch

The credit crunch has well and truly taken hold in the UK. Lenders are tightening their lending criteria, making it more difficult to get credit – and where it is possible to get credit, it is becoming more expensive.

In some ways, people with mortgages are particularly at risk. Interest rates are currently quite low (in most cases, a point or two above the Bank of England’s (BoE) 5% base rate), but if they continue to rise, homeowners may soon find their mortgages take up a larger proportion of their income than they expected.

What’s more, around 1.4 million homeowners are due to finish fixed-rate periods on their mortgages in 2008. Those people have a choice: they can continue their existing mortgage and pay the lender’s Standard Variable Rate (SVR), which tends to be more costly (and can go up or down), or they can remortgage – but with the credit crunch raising the cost of borrowing, is it still possible to get a deal that’s as good as the one they signed up to a few years ago?

Why remortgage?

A remortgage can potentially lower costs to homeowners in two ways:

• Lower interest rates – if your mortgage started when interest rates were higher (in 1998, for example, when the BoE’s base rate reached 7.5%), or if you are about to start paying your lender’s SVR, you may be able to find a mortgage deal with a lower interest rate.
• Lower monthly repayments – you may be able to reschedule your payments, often resulting in lower payments each month (but be warned: this is likely to mean paying the mortgage back for longer, and you will quite possibly pay more in the long run)

It’s also possible to free up some of the money tied up in your home (your ‘equity’*) to pay off some or all of your debts, by remortgaging and repaying it on top of your existing mortgage amount. This is known as a debt consolidation remortgage**.

How easy will it be to get an affordable remortgage?

The BoE’s base rate might have come down, but mortgages are still more expensive than they have been in recent years, and this applies to remortgages as well as purchase mortgages. Banks do not want to lower their interest rates while the future of the market is uncertain, and many signs point to rates getting higher.

However, if you have put down a reasonable deposit and have kept up with repayments, getting a remortgage may not be as difficult as you think. A remortgage does not have to involve borrowing more money – just re-arranging your existing mortgage – so lenders may not be as worried as they are about other types of loan.

You won’t necessarily escape a higher interest rate. But the higher your deposit and the more reliable you have been in terms of repayments, the lower your interest rate is likely to be.

But if you only put down a small deposit when you bought the house, or if you have a poor credit history, you may struggle to get a remortgage. Many lenders now limit remortgages to 80% of the property’s value – meaning you would have to own at least 20% of your home’s value in equity.

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* Equity: the proportion of the value in your home that you own (your deposit, any repayments you have made and any increase in your home’s market value)
** For more information on debt consolidation remortgages, click here

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