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Bridging the mortgage gap: How to take advantage of record low rates

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The mortgage arena remains a market of two halves with the best deals available only to borrowers with a perfect credit history and a healthy chunk of equity in their home.

In contrast, first-time buyers and those with little or no equity continue to struggle. But all borrowers should try, where possible, to take full advantage of low mortgage rates.

Financial Mail examines the options.

EQUITY RICH

Borrowers with at least 30 per cent equity in their property have never had it so good. Many are already paying super-low mortgage rates as a result of reverting to lifetime tracker deals after previous fixed-rate and discounted-rate deals ended.

Others can look forward to remortgaging to short-term fixed-rate loans at less than three per cent or to tracker deals with starting pay rates of just 2.47 per cent.

Last week, Accord, the specialist lending arm of Yorkshire Building Society, launched a five-year fixed rate of 3.64 per cent for those with 25 per cent equity or deposit.

The downside is a steep £1,995 fee. It follows launches by Yorkshire itself and Nationwide Building Society of five-year fixed rates at 3.89 per cent. Five-year fixed rates have not been this low for almost ten months so these deals are likely to be snapped up.

Accord also offers a 3.84 per cent five-year fix with a £995 fee. Ultimately, the type of deal homeowners and movers plump for will depend on their attitude to risk.

The base rate was held again – at 0.5 per cent – this month. It looks increasingly likely that interest rates will not go up in the short term. That said, anyone with a large mortgage or who is on a tight budget may not want to be exposed to any unexpected rate rises. Fixing removes any uncertainty.

David Hollingworth, mortgage expert at broker London & Country in Bath, Somerset, says: ‘There is a lot of uncertainty surrounding interest rates and that makes life difficult for mortgage borrowers. Trying to second guess interest rate rises is a gamble.

Borrowers should try to make a decision based on their own financial circumstances that they will be comfortable with.’ Short-term fixed rates are particularly keenly priced.

NatWest last week launched a two-year fixed rate at 2.55 per cent with a £999 fee, available to those with 40 per cent equity.

Bear in mind there will be another fee to pay in two years for those who then remortgage again.

Tracker rates look attractive

Woolwich, part of Barclays, has a lifetime tracker at 1.97 percentage points above the base rate. It has a £999 fee and borrowers need at least 30 per cent equity or deposit.

Those with 25 per cent equity can get a deal at 2.28 points above the base rate. Mortgage borrowers can build in some security while not locking into fixed rates.

First Direct and Woolwich are both offering capped-rate deals where the rate tracks the base rate but has a cap above which the borrower’s pay rate cannot rise.

First Direct’s deal tracks at 2.18 points above the base rate until September 2014 and the pay rate is capped at 3.98 per cent. There is a £999 fee and borrowers need 35 per cent equity.

Lenders, including Nationwide, Skipton and Yorkshire building societies, Royal Bank of Scotland, Woolwich and Santander offer ‘switch-to-fix’ arrangements on many of their tracker deals.

This means that eligible borrowers can remortgage to one of their lender’s fixed-rate deals without incurring a penalty. However, some lenders operate switch-to-fix in different ways, some charging a second arrangement fee to fix or restricting the fixed-rate deals on offer.

Accord has launched a hybrid deal through selected mortgage brokers, including John Charcol and London & Country. It tracks at 1.79 points above the base rate for the first two years followed by a fixed rate at 3.99 per cent for three years.

Borrowers must have a deposit or equity of at least 25 per cent and they are tied in to the deal for the full five years. The downside is a sizeable arrangement fee of £1,995.

EQUITY POOR

Finding a reasonable mortgage rate is harder for those with less than 20 per cent equity or deposit.

As a result, millions of homebuyers have been forced on to their lender’s standard variable rate as fixed-rate or discounted deals have ended.

Hollingworth says: ‘Clearly, some standard mortgage rates, particularly historic ones such as those offered by Nationwide and Lloyds at 2.5 per cent, are hard to beat.

‘But not all are attractive with some now over five per cent. Added to this, rates will start to rise at some point and borrowers on variable rates are then at the mercy of their lender. Some may hike rates faster than the Bank of England.’

Homeowners and buyers with ten per cent equity or deposit have less choice and rates are higher. But Melanie Bien, director of mortgage broker Private Finance in central London, says it is still possible to obtain a good rate and build in some rate security.

‘There are more options – even for those with little equity – than a couple of years ago,’ she says. Yorkshire Building Society has a two-year fixed-rate at 4.79 per cent for those with at least ten per cent equity, or 5.59 per cent over five years.

Both deals carry a £995 arrangement fee. These offers compare with a typical standard variable rate across the market of about 4.75 per cent. At 20 and 25 per cent equity, the market opens up even more.

FIRST-TIME BUYERS

Bank of Mum and Dad is first stop for most first-timers

The Government claims it is committed to helping young people on to the property ladder.

Housing Minister Grant Shapps this month urged lenders to offer ‘mates’ rates’ mortgages to groups of buyers as a way of helping first-timers. But eight in ten first-time buyers still need help from the ‘Bank of Mum and Dad’.

The big deposit required by most lenders frustrates many would-be first-time buyers. But there are ways around the problem as trainee accountant Dan Russell, 25, found.

After saving hard for a few years, Dan and girlfriend Rebecca Brewer, 22, a contracts manager, raised about five per cent of the value of a typical two-bedroom property where they lived in Bridgewater, Surrey.

They were keen to buy, but rates on 95 per cent loan-to-value mortgages were high. Dan spoke to a financial adviser at work and was told about Bath Building Society’s parent-assisted mortgage scheme.

The society lends up to 95 per cent of the property value but loans over 75 per cent require a parental guarantee.

A collateral charge is taken by the lender over the parents’ property for the amount of loan above 75 per cent.

Dan says: ‘I’d have struggled to get on the property ladder without this scheme.’

He borrowed £98,800 from Bath at a variable rate of 5.29 per cent over three years, resulting in monthly repayments of £595. There are no fixed rates available under the scheme, which may not appeal to many young buyers. The fee is 0.5 per cent of the advance – £494 in Dan’s case.

His parents, John and Lyn, will have a charge on their property from Bath for the £20,800 value of loan above 75 per cent.

Only once the equity in Dan’s property reaches 20 per cent will the charge on their home be lifted. There are other options for cash-strapped buyers, including an ‘offset plus’ deal from Yorkshire Building Society.

This enables parents to use spare savings to offset against a child’s mortgage to reduce repayments. Marsden Building Society has launched a similar offset scheme.

Lloyds TSB’s Lend a Hand scheme offers 95 per cent mortgages, but parental savings of at least 20 per cent must be ‘locked down’ to act as collateral. Some lenders allow groups of friends to club together to buy property.

For example, the Co-op has a Share to Buy scheme. The Co-op, The Mortgage Works, part of Nationwide Building Society, and National Counties Building Society, are among those that allow parents to act as guarantors on all or part of a child’s mortgage.

This may enable children to borrow more than their own income would usually allow.

Shared-equity schemes are another way to help first-timers, allowing them to part-buy, part-rent with a view to building up their equity. They are usually run through housing associations.

HomeBuy is the Government’s shared equity scheme but it has strict eligibility criteria. Visit direct.gov.uk and search on ‘Housing’.

Source www.thisismoney.co.uk/money/mortgageshome/article-2015460/How-advantage-record-low-mortgage-rates.html#ixzz1SNcvirMX

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