With unemployment rising fast in the UK, there is a growing "mortgage underclass" of borrowers who cannot break away from their lender even if the rate they are paying is wildly uncompetitive. Thousands of borrowers who mortgaged two or three years ago onto discount rates, fixed or tracker mortgages with a limited period, will see their deal expire sometime soon. If they remain with their existing lender the interest rate on their mortgage will revert to the lenders Standard Variable Rate (SVR).
The problem is that no new lenders will take them on and they are stranded, left at the mercy of their existing lenders. Many mortgage lenders have ignored many of the Bank of England's interest rate cuts and have kept their SVR high. With the bank rate currently at 0.5 per cent many lenders have maintained their SVR at 5 per cent whilst some are at the 3 percent level and one I am aware of is at 2.5 per cent.
It is likely that many of the jobless will talk to their existing mortgage lender about a new deal without telling them that they are out of work, hoping that the lender will not ask them for a new full application which would include full income disclosure. And so long as their payment record was perfect, the odds are that most of them will get away with it.
Mortgage lenders normally offer a selection of alternative deals to their clients who are coming to the end of an existing deal. For example, the new deal may be a two or five year fixed rate or a two year tracker. Often they will charge a switching fee to move an existing borrower onto a new deal but most do not routinely ask for up to date proof of income - most rely on the original information provided.
However, if you fall behind on your repayments and the lender discovers that you were out of work when you remortgaged, do not be surprised if they hit the roof! We think that the best advice is to explain your situation and still make a good case for allowing you to switch. If you have a perfect repayment history and plenty of equity in your house, say two thirds, then we think you stand a chance.
But if you can't persuade them and you have to accept their SVR, it might not be too bad. Even 5 per cent is low by historical standards. Then, when you've found a new job, you can reinvestigate the possibility of remortgaging to a better deal either with your existing lender or elsewhere.
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