Money Story

02 December 2008 00:52 BST

Start mortgage search months early

Homeowners looking to remortgage are being urged to seek out a new deal six months before the current rate expires.

In 2008 some 1.4 million fixed rate mortgage deals will have needed refinancing to prevent homeowners falling onto their lender's high standard variable rate (SVR) and higher repayments.

However, mortgage deals are drying up – with only 3,500 deals on the market now compared with 15,000 a year ago.

Today the Bank of England warned the mortgage crunch is set to deteriorate further as lenders aim to steer clear of risk and tie in their mortgage deals to only those with enough equity behind them and a clean credit record.

As such Ray Boulger, senior technical manager at John Charcol is warning homeowners to start organising a remortgage deal as six months before their current teaser rate expires – but only a couple of weeks ago he was advising people to wait as rates were falling.

"In the first half of this year, as the impact of the credit crunch resulted in rapidly deteriorating conditions in the mortgage market, we were advising clients to start talking to us about remortgaging six months in advance of their initial interest rate finishing," he said.

"As conditions in the mortgage market improved from July until a fortnight ago, particularly with fixed rates falling in anticipation of Bank Rate being cut quicker and further than previously expected, the rationale for making an early remortgage application changed, particularly for borrowers wanting a fixed rate.

"However, with the even greater freezing up of money markets we are now experiencing there is again a strong argument for acting sooner rather than later."

He went on to explain that with the inter-bank lending rate Libor fluctuating violently, lenders are most unlikely to cut the tracker margins above bank rate they offer, but some increases are expected.

"Therefore there is a strong argument for getting in quick as once a mortgage deal has been secured, borrowers will still reap the full benefits of the expected Bank Rate cuts," he said.

"Lenders’ offers are generally valid for periods of between three and six months, depending on the lender, and so securing now for later is quite feasible."

Mr Boulger went on to explain that how to act on fixed rate remortgage deals was less straightforward.

"The continued uncertainty in the markets means that anyone wanting to remortgage this year should delay no longer. With the next Bank Rate cut now looking increasingly possible for this month, but an almost certainty by November, with more to come soon after, borrowers whose current deal ends in more than four months may prefer however to wait before applying for a fixed rate," he said.

Another spanner in the works for remortgage customers is falling property values. The more equity behind you and the lower the loan-to-value of the deal the more likely a lender is to accept a deal.

However, with falling property values, people's equity is being eaten away.

"With property values still falling, some borrowers who today will quality for a 60 per cent, 75 per cent or 90 per cent rate are likely to find that in two or three months time a fall in their property value, combined with a cautious mortgage valuer, will take their required LTV above these key points," Mr Boulger said.

"Anyone in this position should talk to their broker now, especially if they are already close to the 90 per cent barrier, as anyone needing more than 90 per cent is unlikely to find any rate worth remortgaging to in the near future."