Equity is your saving grace to get best deal

HOMEOWNERS with little or no spare equity in their property face paying twice as much for their mortgage as those who own a larger slice of their home.

Mortgage rates for people borrowing just 60 per cent of their property’s value start at 3.49 per cent but somebody borrowing 90 per cent could have to pay more than 7 per cent to secure a deal.

And if you need to borrow more than 90 per cent, you might struggle to get a mortgage or remortgage at all. This means that although the Bank of England base rate has been slashed to an all-time low of just 1.5 per cent, it is only homeowners with a lot of equity in their properties and those buyers with large deposits who will really benefit.

Lenders are reserving their most competitive rates for these borrowers, because they consider them a safer bet.

With house prices expected to fall a further 10 or 15 per cent during the next 12 months, lenders are wary of people borrowing more than 90 per cent of their property’s value, because they could find themselves in negative equity by the end of the year.

If these borrowers fall behind on their mortgage repayments and the lender is forced to repossess, it could end up selling their property at a loss, says Jonathan Cornell, managing director at Hamptons Mortgages.

“So lenders either charge them more or turn them down altogether. To get the very best deals, you ideally need to borrow no more than 75 per cent of your property’s value or, better still, 60 per cent.”

To make matters worse, as house prices fall, the amount of spare equity in your home will also shrink. Your mortgage may have been worth 75 per cent of your property’s value a year or two ago but today it could have risen above 90 per cent.

Your first step is to calculate the current price of your property, then work out what percentage of its value you need to borrow.

VALUING YOUR PROPERTY

YOUR property’s value isn’t what it used to be. In fact, homes in the UK are worth, on average, 15.9 per cent less than a year ago, according to Nationwide building society.

But some house prices have fallen faster than others, so you need to work out how much your own house is worth before you can get an idea of how much equity you have — and what kind of mortgage deal you might be eligible for.

Start by using a simple online house-price calculator, offered by Nationwide (www.nationwide.co.uk/hpi) or Halifax (www.hbosplc.com/economy/HousePriceCalculator.asp).

These free calculators, based on Land Registry data, show regional house price movements based on completed sales, says Alan Gearing, property services director at website Rightmove.co.uk. “They are a useful guide to house price movements but aren’t accurate enough to get a proper fix on the value of your home.”

They ignore key factors such as the size, type and condition of your house, and the popularity of your neighbourhood.

So you have to do your own research as well, Gearing says. “Check property websites to see asking prices for homes similar to yours but discount these by about 10 per cent to reflect the current uncertain market.”

Check prices in your local estate agent’s window or website, or pop in to have a chat. “The agent won’t want to visit your property if you aren’t thinking of selling, but they are the experts who know what’s happening in your street, and will help you get your figures right,” Gearing says.

There’s another rule of thumb you can use. “House prices are generally falling back to levels seen in 2005. If you have a good idea what it was worth then, that’s not a bad starting point.”

Then work out how much you need to borrow, and what percentage of your property value your mortgage will be.

For example, if you think your home is now worth £200,000, and you have an outstanding mortgage of £150,000 (check your most recent mortgage statement for this figure), then your loan-to-value (LTV) is

75 per cent, and you have 25 per cent equity.

If your LTV is still too high, consider using any spare savings to reduce your borrowings and secure a better rate of interest. Armed with this information, you can then find the right deal for you.

On this page, Melanie Bien, director of mortgage broker Savills Private Finance, has named the best mortgage deals on the market for borrowers with different levels of equity in their property.

VERY LITTLE OR NO EQUITY, OR SMALL DEPOSIT

YOUR troubles really start once you need to borrow more than 90 per cent of your property’s value.

Those with little or no equity at all have little choice but to go on to their lender’s standard variable rate (SVR) when their existing deal ends. The good news is that these can be as low as 3.5 per cent, and you may also benefit from future base rate cuts. It depends on the lender.

Lloyds TSB and Nationwide’s SVRs are 3.5 per cent, while HSBC charges 3.94 per cent. But Skipton building society charges 4.5 per cent, Abbey 4.94 per cent, Alliance & Leicester 5.34 per cent and Barclays 5.49 per cent. This means Barclays charges 1.99 per cent more than its fellow bank Lloyds TSB, adding £2,000 a year to a £100,000 mortgage — or £167 a month.

If you have almost no spare equity, or you are in negative equity, there isn’t much you can do about it. Just be grateful if your lender charges one of the lower SVRs. Bien says if you’re thinking about remortgaging, it might be wise to act sooner rather than later. “Falling house prices will erode the spare equity in your property. If you are already close to 90 per cent LTV, and paying a hefty SVR, it might be worth shopping around for a better deal now, while there is still time,” Bien says.

The sad fact is, the people who lack the financial cushion of spare equity will be forced to pay the most for their mortgages – and will have little opportunity to get better rates elsewhere.

MEDIUM EQUITY OR DEPOSIT: 25%

Once you need to borrow three-quarters of your home’s value, your choice shrinks and costs rise. Abbey offers a two-year fix charging 4.29 per cent up to 75 per cent LTV, with a £995 arrangement fee.

Valuation and legal fees are free, and the maximum loan size is £550,000. It also offers a tracker charging 2.54 per cent over base for two years — 0.35 per cent higher than its 60 per cent LTV tracker. “It is more expensive but the difference isn’t that punishing,” Bien says.

LOW EQUITY/DEPOSIT: 10-15%

If you need to borrow 85 per cent of your property’s value, interest rates quickly rise and you could find it almost impossible to get a tracker rate.

Coventry building society offers a two-year fix charging 4.99 per cent until March 2011, available for up to 85 per cent LTV and with a £999 arrangement fee.

But most loans charge above 5 per cent. Abbey offers a three-year fix at 5.84 per cent with a £995 fee and Alliance & Leicester offers a three-year fix until March 2012 at

5.44 per cent. Its arrangement fee is a hefty 2 per cent of your loan. So if you borrow £100,000 you will pay £2,000, or £3,000 on a £150,000 mortgage.

Once you need to borrow 90 per cent of your property’s value, mortgages get pricier still, and you might have to fix your rate for longer.

C&G offers a five-year fix until April 2014 at 6.09 per cent, with a £995 arrangement fee but most rates are above 7 per cent. Abbey offers a five-year fix until March 2, 2014, at 7.09 per cent, with a whopping £2,499 fee.