Good news — record low interest rates mean the number of home repossessions is falling. But the bad news is that there could be dangers ahead with borrowers sleepwalking into disaster.
That’s the view of banker-turned-mortgage-adviser Stuart Gregory, who says borrowers need to check their rates and act to get a decent deal before it’s too late.
“The continual low interest rates have kept people safe in their homes, while household bills have rocketed,” he points out. “Once interest rates begin to climb, the true pain of those utility bill rises will be felt.”
It’s just one reason why he fears the misery of repossession will start to climb again as people struggle to meet bills. But there’s the added complication of new mortgage lending criteria.
“We’ve had huge changes in borrowing rules since the beginning of the recession, and again when the Mortgage Market Review came into play in April 2014,” Gregory, managing director of the Lentune Mortgage Consultancy says.
Just over a year ago, lenders were handed responsibility for ensuring borrowers could afford loans. Failing to lend responsibly means they face penalties and fines.
Borrowers, including those remortgaging, face a barrage of fresh obstacles and, often, interviews lasting hours before they’re granted a loan.
“Most of the UK hasn’t experienced this, as they’re told by [Bank Governor Mark] Carney that ‘rates won’t rise yet’,” points out Gregory. He believes there’s a huge false sense of security among homeowners.
“People are sitting on their hands and effectively waiting to be told when it will be time to remortgage. They don’t feel under threat because of the Bank of England approach.”
He warns that borrowers with interest-only loans are in the worst position.
“They probably don’t even know yet how hard it will be for them to remortgage. Getting an interest-only loan has become much more difficult in the past six years.”
Part of the problem, he says, is that all of the focus is on when the bank base rate will rise. Carney has intimated this won’t be for some time, at least until 2016. That suggests borrowers are safe to carry on as they have done in the past few years with no fear of a sudden rate shock.
But that focus ignores how the fixed-rate mortgages work. “When a lender prices a fixed rate, it’s based on the cost of them borrowing funds from the money markets: base rate itself has little effect,” Gregory explains.
“By the time most borrowers act on the eventual warnings from the Bank of England, it’ll be too late. Lenders will spot the signs of change, and gradually increase the fixed rates they offer.”
Standard variable rates also work independently of the base rate and tend to be driven by competition.
Many may be much higher than borrowers realise, with lenders charging from around 4% even though base rate is 0.5%.
“We’ve turned from a nation obsessed with remortgaging every two years to one where people now don’t even know their options, which is a scary prospect,” Gregory says.
“Those who were approved for a mortgage in 2008 may not be approved now, even for the balance they already have.”
