Get more out of your mortgage

By Kara Gammell Published: 11:37AM GMT 19 Feb 2010

Amid all the bad news for savers, the outlook for borrowers has improved from the dark days of the financial crisis when many lenders effectively shut up shop.

There are about 2,000 mortgages available on the market, an increase of 25pc in the past six weeks, and in some cases rates have come down. Tracker rates, for instance, are at their cheapest on record they ought to be given Bank Rate is just 0.5pc.

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But their respite might turn out to be temporary. Lending in January slumped to a 10-year low, while a double-dip recession is on the horizon while there are fears that if the Bank of England continues to ignore pleas from lenders to extend the mortgage liquidity scheme in January 2011, then higher mortgage rates are inevitable.

Why? Because lenders will struggle to borrow from wholesale markets to fund deals, so the number of mortgage deals will dry up and mortgage rates will rise as competition falls.

Let"s not forget that even though the number of deals has increased, lenders are still being stringent about who they lend to and reject.

Melanie Bien, director of independent mortgage broker Savills Private Finance, said that it was not so much about lenders being increasingly relaxed, but more a case of who was lending.

She said: "The vast majority of new lending and remortgaging is being done by a handful of the bigger lenders, such as Lloyds Banking Group, HSBC, Santander (via Abbey and Alliance & Leicester), Northern Rock, Nationwide, Royal Bank of Scotland (NatWest) and Woolwich (Barclays). Other lenders are offering competitive deals on occasion, but don"t have the same level of funds available to compete with bigger lenders."

Ms Bien said the big names had done most of the mortgage lending last year and would continue to do so this year. She said: "They offer the "best buys" on new lending and remortgaging, and are more likely to offer higher loan-to-values (LTVs) and be more flexible than some of the smaller lenders. Private banks, such as Coutts, are also extremely competitive on rates and terms for the right sort of high-net-worth customer."

David Hollingworth, from mortgage broker London & Country, agreed and said that lenders were showing more appetite to compete and offer better products.

"For example, Yorkshire Building Society has launched some very attractive rates, including a two-year fixed rate at 3.09pc with a £1,195 fee. Even smaller lenders are coming up with great rates Melton Mowbray has a two-year fixed rate at 3.25pc with a £998 fee."

Mr Hollingworth said that improved rates meant there were more options for people wanting to switch, which is good timing for some as lenders have been increasing standard variable rates.

The main way that some lenders have become more relaxed for new customers over the past few months is by increasing the maximum loan to value (LTV) they require.

"Most lenders, however, have not relaxed their criteria and many, particularly some of the largest, still operate a "computer says no" policy," said Ray Boulger, senior technical manager at brokers John Charcol. "It is generally some of the smaller and medium-sized building societies which have become more accommodating, with NatWest and Cheltenham & Gloucester also within the past month offering better deals up to 90pc LTV."

The market for first-time buyers has eased, too. They tend to have a small deposit, so lenders such as Nationwide, Abbey, Halifax and NatWest, are best for 90pc LTV deals, Ms Bien said. Credit scoring was much higher for those with small deposits so you need a "squeaky-clean" credit history.

The average two-year fixed rate for a borrower with a 10pc deposit has increased steadily since April 2009 and is now at 6.48pc, the highest level since December 2008, according to Moneyfacts.co.uk. The average rate for a borrower with a 25pc deposit stands at 4.27pc, the lowest level since July 2009. Mr Hollingworth said: "It will therefore still pay for first-time buyers to get as big a deposit together as possible."

Mr Boulger suggested this type of borrower use a lender who either does not use credit scoring, or employs a human underwriter to review cases rather than a computer.

He said: "Credit scoring is a particular nightmare for many first-time buyers because it works on the basis of assuming you can"t be trusted with a mortgage until you can prove by virtue of meeting other credit commitments, such as credit cards or an unsecured loan, that you make payments on time. Guilty until proven innocent."

There is of course, the fixed-rate dilemma. Should borrowers snatch a new deal or wait for a better one?

Ms Bien said borrowers who needed a fixed rate would do well to move from their current fix onto another straight away: "Fixes have fallen in recent weeks so now is as good a time as any to secure a competitive fix, particularly if you have a lot of equity in your property."

Mr Hollingworth thinks the decision will depend on what rate they will pay in the meantime. He said: "Although some SVRs are very low, many are much higher, more than 6pc in some cases, and delaying the switch to a better rate in the hope of bagging a slightly cheaper rate in a few months time is likely to prove costly if you are paying over the odds in the meantime."

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