Why you have a small window to remortgage

Published 20th Dec 2009

Price rises have restored equity in people's homes so now is the time to remortgage before prices dip again


Borrowers are being advised to remortgage now and potentially cut their repayments by nearly £1,700 a year after house-price rises in the past six months helped restore equity in their homes.

Hundreds of thousands of homeowners had been forced to take out more costly mortgages as prices dipped and lenders increased the price of loans for those with less equity in their homes who are considered a greater “risk”.

However, the rebound in the average house price over the six months to October has opened a “remortgage window”, giving homeowners access to the best mortgage rates since house prices troughed earlier this year, according to analysis by First Direct for The Sunday Times.

Prices rose almost 4.5% from £152,761 to £159,546 over the six months to October, according to Land Registry figures used by First Direct.

Suppose someone bought a property between September and October 2006, at £168,101, and took out a mortgage with a 20% deposit. Their equity would have fallen to 17% by April this year, but they will now have 5% more equity at 22%, according to First Direct.

This in turn means they are eligible for the better deals on offer to those with deposits of at least 20%, such as Royal Bank of Scotland’s two-year tracker at 3.19%. Repayments on the loan work out at £605 a month.

The best deal they could have got with a 17% deposit was Britannia building society’s lifetime tracker at 4.59%. With repayments at £701 a month, they would have been £106 worse off with the Britannia deal.

The housing market recovery this year was most significant for those who bought most recently — that is, around the peak, which according to the Land Registry was between September and October 2007, when the average house price hit £183,500.

Borrowers who could put down a 20% deposit at the time would have seen their equity shrink to just 7.14% by April 2009. The best deal for those with a deposit of less than 10% was Abbey at 7.09% and repayments would have been £1,010 a month at that time.

Now, however, their equity would be back to 12.16%, giving access to a Chorley building society standard variable rate at 5.49% with repayments at £870 — so they would be £140 better off a month, or £1,680 a year.

Jimmy Kelly, head of mortgages at First Direct, said: “This shows just how important the rebound in house prices has been for existing homeowners. Rebuilding the equity in their homes is essential in gaining access to lower rates when they come to remortgage.”

Borrowers are warned, though, that the “window” could close if values fall in 2010 as some experts forecast.

Having said that, mortgage rates could be set to improve further — the average two-year fixed-rate mortgage peaked in August at 5.21% but has steadily fallen to 4.93% in December, according to analysis from Moneyfacts, the financial data firm.

Michelle Slade of Moneyfacts said: “In the past month, as lenders become more accustomed to the post banking-crisis world, are we seeing competition start to return to the market.

“Borrowers will be hoping that 2010 will see rates continuing to fall and that the tentative steps being taken to offer competitive rates for those with smaller deposits will continue.”

Source: ' Sunday Times '

View All Latest Articles