Tide turns for homeowners thinking of remortgaging

After two years of torpor, the mortgage market is stirring once again. House price in some parts of the UK are recovering and it seems that lenders are once again doing what they are meant to do – lend. For the first time in a long time, we are seeing new products coming to market and the first buds of competition.

Meanwhile, many borrowers who have been sitting pretty on ultra-low standard variable rates have started to see their repayments rise as lenders look to restore their profit margins.

So what does this mean for people with a mortgage? In short, remortgaging – moving from one lender to another with a better a rate – is back on the cards, at least for some.

In May 2007, shortly before the property bubble burst, 117,774 remortgages went through. In December 2009, the number had dropped to a measly 23,220. Homeowners have had the odds stacked against them. Those who had seen the equity in their properties falling had been unable to remortgage, finding higher loan-to-value (LTV) deals considerably harder to find and more expensive. With 100 per cent LTV completely out of the question, those in negative equity would have had no choice but to stick. There has also been a limited supply of products on the market and, with standard variable rates so low, little incentive to switch to a product which would invariably be more expensive.

However, things are changing. "Life goes on despite recession and people need to move," says Andrew Montlake, a director of mortgage broker Coreco Group. "If they find a good quality property, people are paying the going rate. This is keeping house prices up." Rising valuations are pulling people out of the equity slump, nudging homeowners towards the affordable end of the LTV scale. "A lot of people had slipped beneath the LTV line who can now remortgage," says Mr Montlake. "That's one reason why we're going to see levels increasing."

"Remortgaging is definitely in the air," says Darren Cook, a spokesman for online financial information service Moneyfacts.co.uk. "Competition is slowly coming back to the market. Lenders are changing products and competing for business and there are banks out there that are looking to lend." In February alone, the number of mortgage products available has increased by more than 300 and the total for January increased by 1,000. The number of products for the 85-95 per cent LTV levels has also risen, opening up possibilities for those with less equity. In August 2008, there were 475 mortgages at 90 per cent LTV, dropping to a low of 71 in May 2009. Since then, the number has more than doubled to 144 in February 2010. More competition gives homeowners more options and better rates. "Competition in the market is driving down costs of mortgages," says Ray Boulger, a spokesman for mortgage broker John Charcol. "This is making it more viable for people to switch. This time last year, it was not worth remortgaging unless you were switching to a fixed rate."

Rates are improving, but few stand up to the ultra-low SVRs that many continue to take advantage of. Figures show that an average of 50 per cent of mortgage customers are staying on SVRs compared with an average of 30 per cent before the crash. Reluctance to switch has been a factor in the stagnation of the remortgaging market, but changes to lending policy are shaking things up. No longer able to afford customers riding on low SVRs, several building societies, including Skipton, Cambridge, Nationwide and Norwich & Peterborough, have cited exceptional circumstances and boosted their SVRs by more than 1 per cent. Some have claimed that it is in order to protect their savers, but Skipton, the first to act, admitted its business was unsustainable with a 3.5 per cent SVR, demonstrating it is profits and not savers lenders are looking to protect. Higher SVRs are pushing homeowners back into the mortgage market to review their options. "Those who have at least 25 per cent equity can switch to a lifetime tracker that would be sufficiently cheaper than any SVR from 3.5 per cent upwards," says Mr Boulger.

Much of the reticence in the mortgage market has been prompted by uncertainty. However, some homeowners have seen the base rate in the doldrums for 10 consecutive months and are betting on an imminent rise. At the moment, First Direct has a two-year fixed-rate at 3.29 per cent with a £998 fee (3.7 per cent APR) and ING is offering 4.29 per cent fixed until 2013 with a £795 fee (3.8 per cent APR) both up to 75 per cent LTV. HSBC also has a five-year fixed rate at 4.73 per cent with a £999 fee (4.4 per cent APR), up to 60 per cent LTV.

Others believe base rate will stay low for the foreseeable future and wish to continue paying a low rate, but in order to do so they must remortgage on to a tracker or discount as banks sever the connection between the Bank of England decisions and SVRs. They are looking at lifetime tracker deals like the strong offerings from the Woolwich at base rate plus 2.13 per cent for those with at least 70 per cent LTV and base rate plus 2.39 per cent for 75 per cent LTV. For both of these camps, it appears as if it is just a matter of time. "As soon as we see base-rate movement the remortgage market will come back responsibly," says Mr Cook. "Banks had their arms twisted to reduce their SVRs so low, but government aid is coming to an end and we'll see this reflected." Whichever path homeowners take, they lead to remortgage.

That is unless you fall into a third camp that is unable to remortgage. House prices are rising, but slowly. "For growth to continue, we would need to see an increase in prices of over 1 per cent each month," says Martin Gahbauer, the chief economist at Nationwide. "Prices are still more than 10 per cent down on the 2007 figures, so although outlook is positive, recovery is still tempered."

Homeowners who took out a 90 or 100 per cent mortgage shortly before the crash or have lost their jobs may have difficulty finding a deal. "Although there is definitely a significant increase in the higher LTVs available you still pay a big premium," says Mr Boulger. "Unless you've got 20 per cent there's not much point in remortgaging." The option for those with less equity is going to their existing lender. Halifax, Nationwide, Santander and others have competitive products, but Mr Montlake says there are no promises. "There is still a massive chunk of people for whom remortgaging is still a good 12 months away."