A third of borrowers who have seen their income fall as a result of the pandemic fear they may not be able to remortgage, research has found – but brokers say they shouldn’t just assume they have to move onto their lender’s costly standard variable rate (SVR).
It has been estimated that 700,000 short-term fixed-rate mortgages are due to come to an end this year, and borrowers will be moved on to their lender’s higher SVR unless they apply for a new deal.
The average SVR charged by banks and building societies is currently 4.51%, far above the best-buy fixed-rate loans on the market. For two years, borrowers can fix at a rate of 1.15% with NatWest if they have 40% equity, while the same bank’s five-year fixed rate is 1.29%.
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The majority of borrowers do not usually pay an SVR, but switch to a new short-term deal – typically one with a fixed interest rate, either offered by their existing lender or a new provider.
However, the Covid pandemic has made it harder for borrowers to shop around as they usually would – and led many to worry that they will not be able to get a new deal, according to two surveys published this week.
In a survey by comparison website Comparethemarket, one in five homeowners said they had been unable to move to a new lender since the pandemic started in March 2020.
Of these, 41% said their application had been rejected because they had lost their jobs, while a third said it was because they were furloughed, and a quarter because of a salary cut.
Separate research for Legal & General Mortgage Club found that a third of borrowers who had suffered financially as a result of the pandemic thought they would have to move on to the SVR instead of switching deals.
Borrowers expressed fears that the past year’s difficulties would make it difficult for them to qualify for a mortgage with a new lender.
More than half who had seen their income fall were concerned that their finances would be scrutinised more closely than before Covid, and a similar proportion were concerned that taking a payment holiday would have affected their mortgage options.
However, Kevin Roberts, director of Legal & General Mortgage Club, says that borrowers, particularly those who have taken a financial hit, should check their options.
“Those who have seen their incomes drop will likely be finding this a particularly challenging time, so it’s vital they avoid falling onto a reversion rate and paying more when there are other affordable options available,” he says.
“Even for those borrowers who have seen a reduction in income, there may well be products available that would save them money in the long term when compared with their lender’s SVR.”
David Hollingworth of broker L&C says borrowers who were unable to remortgage earlier in the pandemic may be in a position to do so now.
“If you were turned down but you have come off furlough, say, you should be able to move now – you will need to show payslips that show you are back working,” he says. “If you haven’t got income, that clearly is going to cause an issue.”
View image in fullscreenMortgage payment holidays are available until the end of March. Photograph: Yui Mok/PA
Payment holidays for borrowers in financial difficulties are available until the end of March.
Recent figures have shown that many of those who took them early in the pandemic are now repaying their loans each month.
Hollingworth says this should allow them to shop around for a mortgage. “If you had a payment holiday and you are back repaying, that shouldn’t be a problem – the payment holidays do not appear on your credit file, so I don’t think they’re a reason not to look at your options,” he says.
Many banks and building societies have said that they will not base mortgages on furlough income, so even if you have an 80% salary coming in, you may not be able to switch lender.
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If you cannot remortgage, staying with your existing lender and switching to a new fixed-rate loan could be an option that allows you to keep monthly costs low, even if your income has been reduced.
At Nationwide, for example, borrowers who have not fallen behind on mortgage repayments can apply for a switch at the end of their current deal so they are not moved onto the SVR of 3.59%.
The society is currently offering existing customers two-year fixed rates starting at 1.84% with a £999 fee and 2.44% with no fee, and a five-year fixed rate starting at 1.89% with a £999 fee.