Race to secure mortgage rights

Property owners looking to remortgage within the next six months should consider purchasing the right to lock into a particular deal in advance, to protect themselves in case mortgage rates climb higher and house prices fall even further.

Mortgage rates and fees may be on the rise in these uncertain times, but many lenders will still allow borrowers to reserve deals months before any papers are signed.

And this represents an attractive option for one reason: if rates dip before the arrangement is due, borrowers can still defect and arrange a mortgage with a lender offering a better deal.

“Reserving a rate in advance buys you peace of mind,” says Melanie Bien, a director with Savills Private Finance, the mortgage broker.

Homeowners faced with expiring mortgage rates should move quickly. Late yesterday, Halifax, the UK’s largest mortgage lender, became the latest group to raise rates – increasing its price on fixed-rate products by 0.1 per cent on average and by 0.2 per cent for trackers. Earlier in the week, Nationwide Building Society raised all its fixed-rate deals by 0.20 per cent, Britannia raised the rate on a selection of fixed and tracker products by up to 0.40 per cent, and Northern Rock increased its tracker rates by 0.50 per cent and its fixed rates by up to 0.35 per cent.

Interest rates are likely to be cut by the Bank of England in an attempt to stabilise the market by the year’s end but this may not be enough to bring down mortgage rates. So, as property prices slump further and lenders demand larger deposits, borrowers are being encouraged to rush to renew tracker and fixed-rate mortgages set to end this year.

“There is a strong argument for getting in quick. Any reduction in the value of the property could outweigh a reduction in rates. Even if you could get a cheaper fixed rate in three months’ time, you might lose out,” says Ray Boulger, technical manager at the mortgage broker John Charcol.

Another point is that borrowers may no longer qualify for a particular loan-to-value (LTV) ratio if the value of their home falls amid the sluggish property market.

“Anyone in this position should talk to their broker now, especially if they are already close to the 90 per cent LTV barrier, as anyone needing more than 90 per cent is unlikely to find a rate worth remortgaging to in the near term,” advises Boulger.

As FT Money went to press, the most attractive two-year fixed rate on offer was a rate of 4.99 per cent from Cheltenham & Gloucester (C&G) which required a deposit of 25 per cent and an arrangement fee of 2.5 per cent, according to Moneysupermarket.com, the research web site.

The most attractive tracker was another 4.99 per cent deal from C&G – which also carries a maximum LTV ratio of 75 per cent and a 2.5 per cent fee.

Brokers warn that those buyers who are looking to arrange two-year trackers with the intention of switching to a fixed-rate deal should try to avoid paying a high fee.

Another option is to take out a drop-lock, which effectively involves buying a tracker first and then switching to a fixed-rate mortgage when rates rise. Trackers appeal to those who are willing to accept the risk of rates not falling quickly. Cautious homeowners should favour fixed-rate deals, analysts warn.

Melanie Bien of Savills Private Finance suggests borrowers should use savings to reduce their LTV ratios as a lower LTV offers borrowers the chance to gain access to a better selection of products as well as more reasonable interest rates.

Lenders penalise those with little equity in their homes by tacking on higher mortgage rates and tend to charge a premium for those borrowing more than 75 per cent of the house price.