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Your Money > Mortgages Articles > Signs of life...
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By Richard Evans
See also: Move or improve - is DIY the answer? Extraordinary things have happened to Britain's mortgage market recently. We have seen, for example, the bizarre spectacle of lenders bending over backwards to keep their products out of the best buy tables, in a bid to hold onto their cash and avoid a stampede of business from customers denied competitive loans elsewhere. An industry that until last year would lend enthusiastically to just about any aspiring homeowner, even those needing to borrow the entire value of the property or possibly even more, became very choosy about who it would do business with - and those 100 per cent loans disappeared. As a result, first-time buyers who hadn't saved a sizeable deposit were forced out of the market, while existing borrowers who wanted to remortgage, often because their affordable fixed-rate deals were about to expire, found that any new loan would cost them more than keeping their old one. But in the past couple of weeks many lenders have announced large cuts in the rates on some loans, implying that they are recovering their willingness to lend. So if you are one of those borrowers who gave up trying to get a mortgage a couple of months ago, is it time to take another look? Yahoo! spoke to several mortgage experts - and found that while conditions have improved in the remortgage market, first-time buyers without significant deposits are still firmly in the cold. "Lenders do seem to have a bigger appetite for lending," says Richard Morea of London & Country, the mortgage broker. "But they are paying far more attention to how much equity or deposit you have. For those remortgaging with equity, things are getting better, but first timers will see little improvement - there are still no 100 per cent loans. Ray Boulger of John Charcol, another broker, agrees. "There's no doubt that the market has improved in terms of pricing, but not when it comes to lending criteria," he says. "There is now competition from lenders to win business rather than competition not to lend. But they are competing only for borrowers needing no more than 90 per cent of the property value." Lenders have always set great store by this percentage, which they call the "loan to value" or LTV. As a lower LTV means a bigger slice of equity in the hands of the borrower, the lender has a greater margin of safety if things go wrong. But whereas in the past a lender might have offered its best rate when the LTV was 90 per cent or less (in other words, a deposit of 10 per cent or more), they are now introducing more tiers. "The LTV has more influence now," says Mr Morea. "Banks are introducing cutoffs of 70, 60 or even 50 per cent LTV for the best rates of interest." So to get the lowest rate you may have to already own half the value of your property. According to Mr Boulger, strong competition among mortgage lenders has returned only for LTVs of 75 per cent or below, although there are signs that building societies are less restrictive about LTV limits than the banks, he says. "Until about two months ago, press coverage of the mortgage market was so negative that borrowers were put off trying," adds Mr Boulger. "Back then, if you were coming off a fixed rate and needed to borrow more than 75 per cent of the property value, you wouldn't have got much better than the rate your loan would revert to." This hasn't changed for LTVs above 90 per cent, he says, but for LTVs between 75 and 90 per cent there is now more chance that remortgaging will be worthwhile. If these signs of a thaw tempt you back to the mortgage market, what kind of loan should you look for? "There are always some people who can't risk rates going up - they will need a fixed-rate deal," says Mr Boulger. "But if you can afford to be wrong on rates, I strongly recommend trackers." Starting rates on the two types of loan are about the same at the moment, he explains, but the Bank of England base rate should start falling from about the end of this year and into next.
A tracker mortgage will follow base rates down, whereas a fixed-rate deal won't. "But you won't want to be on a tracker for ever - sooner or later interest rates will have reached a minimum, the next move will be upwards and it will be time to get a fix. So for now, one good option is to take out a 'drop lock'." Drop locks, he explains, are trackers that allow you to switch at a later date to a fix from the same lender without charge. "There are competitive trackers with this option from Cheltenham & Gloucester and Nationwide, which normally have good fixes available to switch to. But I expect more lenders to offer drop locks; some are certainly looking at doing so," he adds. Some of the best mortgages available
Ordinary trackers start at about base rate plus 0.54 percentage points (currently 5.54 per cent), he adds, while Woolwich offers a lifetime tracker at base rate plus 0.69 percentage points (£995 fee, 60 per cent maximum LTV). If you do want a fixed rate now, Mr Boulger cautions against too long a term. "If you take a five-year fixed deal now, you may miss the opportunity for a cheaper fix in two years' time, so I would go for a short fix such as Cheltenham & Gloucester's at 5.49 per cent for two years." This loan is available up to 75 per cent LTV and amounts of £250,000; there is a fee of £2,094 but valuation and legal work are free if remortgaging. Despite the arguments in favour of trackers, most borrowers seem to prefer the certainty of a fix, according to Mr Morea. "There's always the dilemma of fix versus tracker and it's rather a muddy situation at the moment. But when we surveyed our clients we found that an overwhelming majority of 65 per cent wanted the peace of mind of a fixed rate," he says. Slightly more borrowers are going for longer-term fixes, he adds - possibly because the margin between the rates for two-year and five-year fixes has almost disappeared. When it comes to tracking down the best deal for your particular circumstances, it's best to use a mixture of your own research and help from a broker, suggests David Black of Defaqto, the financial data provider. "Look at the comparison websites - most have good calculators - as well as consulting a broker," he says. Loan options: all you need to know Some lenders have reduced their supply of mortgages via intermediaries to concentrate on dealing directly with customers, but brokers can still search the market for you and guide your application through. Some even offer exclusive deals not available directly from the lender. Mr Black also believes that the mortgage market has eased in recent weeks. "The market is moving in the right direction, although there are still not enough funds around," he says. "Big lenders can turn the taps on and off - at the moment they seem to be keen to lend. If you have a good credit history and a deposit, there should be no problem finding a loan."
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