Borrowers on fixed deals face repayment nightmares

The recent popularity of medium term fixed rate mortgage deals seems likely to cause problems for borrowers as they come to the end of their initial term and find that their repayments are to rise considerably.

Over the past few years up to 50% of all new mortgages have taken advantage of a competitive fixed rate offer which would then revert to the lenders Standard Variable Rate at the end of the term.

A good example of this would be Cheltenham & Gloucester where a borrower could have obtained a two year rate of 4.45% in June 2006 but is now facing an increase to their current variable rate of 7.25%*. Crudely this represents a rise of 63% in their repayments, a figure that would stretch the average family budget.

Lenders have relied on a certain amount of inertia amongst borrowers to revert to variable rates and improve their profits. If the borrower understood their option to remortgage away then the alternative would be to offer another fixed or discounted term at the rate available at the time.

The problem now being encountered is that money supply is so low that lenders have withdrawn or re-priced many of their deals and the variable rate has also risen in relative terms.

To compound the issue, the percentage that lenders are prepared to loan against a property (the loan to value) is also falling as they seek to protect themselves against any fall in property value.

This means that borrowers with a 90% or above mortgage may find that they no longer qualify under new criteria.

So what can a borrower do to help themselves?

The answer is not to stick your head in the sand but instead to plan well in advance (3-6 months) before the end of your fixed rate period.

If you are approaching this then you will need to check the options that are available with your lender and through a qualified mortgage adviser.

Most borrowers with equity in their property will be able to remortgage but the deals available are liable to disappear at little or no notice so a decision needs to be made promptly and an application submitted.

If there is little or no equity in the property then options may be few and far between and it could be that you will have to wait until the market becomes more flexible.

Anyone experiencing difficulties in monthly repayments should seek professional mortgage advice before the problem is compounded with mortgage arrears.

* SVR for Cheltenham & Gloucester correct at 4th April 2008

Your home may be repossessed if you do not keep up repayments on your mortgage.