What Does The Credit Crunch Mean For Re-Mortgagers?

If you're re-mortgaging this year, should the credit crunch be a concern?

This article has already been emailed to many Fools as part of our 'Your Finances in 2012' campaign.

In part two of Dr. David Kuo's report he forecasts a picture of doom and gloom for those seeking credit as lending criteria becomes increasingly strict. But is the outlook equally dismal for mortgage borrowers?

A staggering 1.4 million homeowners have a mortgage with a fixed rate that's due to come to an end in 2008. That means whole rafts of re-mortgages are on the cards as borrowers attempt to avoid their lender's more costly standard variable rates (SVR).

Some of us are beginning to worry that, by the time our fixed-rate deal comes to an end, getting a competitive re-mortgage will have become impossible in the aftermath of the credit crunch. But are we right to be concerned?

Generally it seems the cost of mortgages has become more expensive. Banks have suffered higher borrowing costs themselves (a knock-on effect of the US sub-prime mortgage crisis and the ensuing Northern Rock debacle over here). Ultimately those higher costs are being passed on to individual borrowers to protect lenders' profits. Average mortgage rates have indeed risen lately as banks attempt to recover losses from the credit crunch.

That said, I would like to try and put your minds at rest. Unless you have had credit problems or you're already a sub-prime borrower, I see no real reason why you shouldn't be able to re-mortgage to a satisfactory deal when the time comes. The credit crunch makes it hard for lenders to get hold of enough cash to lend people. But re-mortgaging (or re-negotiating) doesn't normally increase the total amount we've borrowed, so I expect it will be relatively easy for such borrowers.

The effect of the credit crunch on the availability of mortgage funds is more likely to affect sub-prime borrowers and new borrowers. If you have a good credit record and you're only planning to re-mortgage, relax!

But you should think carefully about the type of product you want next. This is not an easy decision particularly given that we don't know what's going to happen to the Bank of England base rate.

Consider a tracker mortgage

If you think the base rate is likely to fall - many experts expect the rate to drop to 5% by the end of the year from its current level of 5.5% - then it makes sense to re-mortgage to a tracker product. A tracker mortgage 'tracks' the base rate which means when the base rate falls, your mortgage repayments become cheaper and vice versa.

In this way a tracker mortgage will allow you to take advantage of any base-rate cuts which take place during the year. It's possible to find trackers with no early-repayment charges. They'll cost a bit more, but they may be worth considering so you can switch to a fixed-rate deal later on if you need to. That will allow you to lock in your interest rate if the base rate begins to rise.

Data from the Council of Mortgage Lenders (CML) suggest that fixed-rate mortgages aren't as popular now as they once were. And since most analysts are predicting the base rate will be cut in 2008, people who choose to re-mortgage to a new fixed rate won't get the benefit of further interest-rate reductions.

Tracker mortgages are generally preferable to products with discounted rates too. Unlike trackers, which are guaranteed to mirror the base rate, discounted rates are linked to the lender's SVR and not the base rate, so there's no obligation to cut discounted mortgage rates should the base rate fall.

More tips when choosing mortgages

Remember, whatever mortgage you go for in the end, the deals with the lowest interest rates often mean high fees. You'll usually have the option of adding these to your loan, but beware this means you'll have to pay interest on the additional borrowing over your entire mortgage term.

Most importantly of all, don't rush into anything. Although your lender will probably allow you to reserve a new product in advance (most mortgage offers last for three or six months) this may not be to your advantage. Acting too early won't give you the opportunity to see how the market settles after the initial credit-crunch turbulence. Ideally, I would suggest you think about re-mortgaging around two months before your fixed rate ends. This will allow you to arrange a new deal in good time.

What about borrowers with a less than perfect credit history?

Re-mortgaging could become more difficult for those with a poor credit history and those who already have sub-prime mortgages. The new deals on offer to these borrowers may not be attractive, or may even be unaffordable.

If you have had credit problems it may be a good idea to speak to your lender now. The last thing you need is a hike in your repayments when you come to re-mortgage. That will only exacerbate your financial situation.

It's crucial you re-mortgage to a product that's suitable for you. Although I've suggested you consider re-mortgaging to a tracker, you may well prefer the peace of mind that comes with fixed-rate repayments. And I can certainly understand that.

When you need to re-mortgage make sure you compare deals and mortgage types using The Motley Fool's Mortgage Service.