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Remortgaging: is now the best time?

Many homeowners may be in their strongest position to remortgage in more than two years thanks to a recovery in property prices. Kevin Rose explains

There's been a recovery in property prices since April which has left homeowners in a stronger position. Many may be in the best position to remortgage in more than two years, especially as lenders offer better rates to people with more equity.

Several mortgage experts believe that borrowers who are on their lender's standard variable rate (SVR) should think about remortgaging now – especially as the only plausible direction for bank base rate to move is up.

That's a return to the situation before the credit crunch, when conventional wisdom dictated that anyone on their lender's variable rate could get a better deal elsewhere and should remortgage. However, the banking crisis and record low bank base rates turned that on its head with most people better off sticking with their existing deals.

Data from the Council of Mortgage Lenders (CML), shows that remortgaging accounted for less than a third of all mortgage lending in October 2009, the lowest it has been since the CML started recording data in 2002.

The equity situation has improved over the past nine months because of house price rises, so much so that brokers and lenders believe most borrowers would now fall into a lower loan-to-value (LTV) bracket if they were to remortgage, increasing their ability to find a competitive rate.

Research by HSBC lender FirstDirect for The Independent shows that for an average house bought in October 2006 for £168,101, with a 20 per cent deposit (80 per cent LTV), the subsequent fall in house price values would have meant the LTV on the outstanding balance – £126,773 – would have risen to 82.98 per cent in April 2009.

But the partial recovery in property prices means that the borrower's equity would have improved by October 2009, as the LTV on the outstanding balance fell to 78.42 per cent, giving the homeowner a rise in equity of more than 4.5 per cent in six months.

The situation was even more marked for those who bought in September/October 2007, just before the crash in property prices. By then the average house price was £183,000, but a borrower with 20 per cent deposit would have seen their equity fall to just 7.14 per cent by April 2008. That would have risen to 12.16 per cent by October.

FirstDirect says a homeowner who bought their property between 2005 and 2007 has improved their options to remortgage since the slump in prices in April because they can now access a lower rate mortgage as they have moved into a lower LTV bracket.

Jimmy Kelly, head of mortgages for First Direct, says the lender's analysis shows how important the rebound in house prices has been for existing homeowners. "Whether they have any intention to sell or not, rebuilding the equity in their homes is an essential element in gaining access to lower rates when they come to remortgage," he said. "If homeowners have a concern that house prices may fall in the New Year, now would be a good time to remortgage and capitalise on the improved level of equity they hold."

Melanie Bien, director of mortgage broker Savills Private Finance, says borrowers considering remortgaging should do so sooner rather than later, as Savills predicts property prices to fall by about 6 per cent over 2010.

"Whether you should remortgage depends on your current situation. If you are enjoying an extremely cheap standard variable rate – anything around 3 per cent or less – you may be tempted to stay put for now. Although interest rates could start to rise towards the end of the year, they will only do so slowly so even with a couple of quarter-point rate rises, you will still have a very competitive mortgage rate.

"Those on a higher SVR – say 5 or 6 per cent – should remortgage now as they could get a more competitive rate."

Katie Tucker from Mortgageforce says interest rates are unlikely to stay at their record low levels and that borrowers need to do some calculations before rates start to rise.

"Remortgagers with as little as 15 per cent equity have far more choice at a rate under 5 per cent than they did a month ago. However the later it becomes, the more likely it is that bank rate will be increased pushing the price of your choices up. Those loitering on their lender's variable rate should consider what extra cost they could incur over the next two years should bank rate go up forcing them on to higher payments then higher remortgage deals; then decide from that whether it may be better value to tie down a year earlier. The peace of mind is the next biggest motive."

Ms Tucker cites the Consumer Price Index rise in November from 1.5 per cent to 1.9 per cent as evidence that the Bank of England could soon raise interest rates to manage inflation. Two-year "swap" rates, generally a fair indication estimate of what lenders perceive to be the average rate over the next two years have also crept up slightly recently, possibly suggesting that the lowest rates are on their way out.

Michael White, chief executive of broker Email Mortgages, fears that when bank base rate finally does rise – by whatever amount – there will be an "almighty rush" to remortgage because borrowers will sense that rates have bottomed out and will not want to be caught out by any substantial increases to the base rate.

He says: "When bank base rate does move it could move quite rapidly to a more "normal" band range of 3 to 4 per cent – this would leave many borrowers on their lenders' SVRs with particularly uncompetitive rates and a corresponding hike in monthly repayments. Borrowers would want to pre-empt that by remortgaging quickly."

Mr White says an increase in demand for remortgage products would test lenders' capacity and appetite to take on this remortgage business. "Lenders are still relatively risk-adverse which could leave many borrowers stuck and looking for a remortgage but forced to stay on an uncompetitive rate," he said. "Plus, there is likely to be a lot of borrowers who self-certified their last mortgage who find that these loans have been eradicated from the marketplace.

"Now would certainly be a time to look at your current options. There are some two-year tracker rates which look particularly attractive if you believe that bank base rate will not rise much in the next 12 or so months but will do after this period; otherwise a significant number of two-year fixed rates have been cut recently."

Katie Tucker says lenders will have also speculated on the probability of bank rate changes and priced their two year fixed deals accordingly. She says: "When choosing between a fixed rate and a variable rate the advantage in the price difference is cancelled out by the likelihood of Bank rate being increased; the total cost should realistically work out about evens."