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Getting the best mortgage - Alison Steed, MyMoneyDiva.com

Getting the best mortgage deal

Getting the best mortgage rate around has suddenly become a tale of two halves. No longer can you expect to be treated as fairly as your neighbour, especially if you have a lot less equity in your house than they do.

The latest figures from financial statisticians Moneyfacts prove the point elegantly, and it can be summarised like this: if you have just 90 per cent equity in your home, you will be paying £4,728 more over the period of the average two year fixed rate mortgage of £150,000 than your neighbour with 25 per cent equity. That is an extra £197 a month for the period. Shocked? Me too.

But then again, let’s take a closer look at this. Mortgage lenders have been hammered by the media and the regulatory authorities for making it too easy for people who really could not afford to buy the property they wanted. You might argue that it was a nice thing for them to have done, after all most of us buy our homes with our hearts more than our heads, so denying someone the chance of fulfilling a dream is pretty harsh.

Yet the reality of the outcome is very different. The Council of Mortgage Lenders’ (CML) own figures show that 46,000 homes were repossessed in the last quarter of 2009 alone – 15 per cent up on the same period in 2008. However, a far greater number – 188,300 mortgages – ended the year with at least 2.5 per cent of the overall loan in arrears, meaning £2,500 on a £100,000 loan. This repossession rate is at a 14-year high.

The CML also has evidence of the way that families are dealing with this debt is also very different, showing that while those who are only slightly in arrears are using low interest rates to get themselves out of trouble, those in deeper debt are only just stabilising their position, not improving it.

So, that brings us back to the rates question. Really, when you consider the rate of repossessions and arrears, it is hard to see how the lenders can do anything other than cherry pick the people they want to lend money to. While in a perfect world we would all be able to benefit from the best rates, we have to be realistic – lenders need to rebuild their balance sheets to be able to lend to us at all. To do that, they are going to have to choose the best risks – the people who are most likely to pay their money back, even if the house does end up being repossessed – to target with their wares.

If you have a 25 per cent buffer on the price of a house that you are lending against, versus just a 10 per cent one, it does not take a rocket scientist to see why lenders are making the rates for the former more enticing. If everything does go wrong, then house prices would have to fall by a quarter for the lender to lose money on a repossessed property.

Does this help those trying to get on the housing ladder? Of course not in the short term, unless they have a 25 per cent deposit. But in the long term, it is likely to have been better for them to not have bought a house at all, than to have gone through the stress, worry and indignity of having it taken away from them, and the consequences that would have on any future ability to get credit.

For now, the best first time buyers and those with low equity can do is sit tight, wait for some more of the financial storm to blow over, and then reassess what they can do to get the best mortgage rate.

Alison Steed

Alison Steed is the editor and co-founder of the personal finance website for women www.MyMoneyDiva.com

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