More than 1.2 million homeowners are coming to the end of mortgage deals this year, leaving them facing some tricky decisions.

In the first half of the year it was a no-brainer for homeowners to revert to their lenders’ standard variable rates (SVRs), which were likely to have fallen sharply. The average SVR remains at 4.61 per cent, compared with 7 per cent a year ago, according to Moneyfacts, the financial website, but more homeowners are considering remortgaging to fixed-rate deals to protect against a sudden rise in rates expected later this year.

Borrowers hunting for a new deal face a number of hurdles, including an unexpected “down-valuation” — when a lender values your home at less than you expected, reducing the amount that you can borrow. Mortgage rates are also climbing and lenders remain very cautious about approving new loans, making it difficult for some borrowers to secure a deal at all.

Down-valuations
Times Money compared ten recent valuations by lenders including Halifax, Abbey and Nationwide with property prices listed on Zoopla.co.uk, the property information website. On average, the valuations were 6 per cent lower than a property’s current estimated market value on Zoopla, but some were up to 13 per cent lower.

When a borrower comes to remortgage, lenders assess the value of the property either by using an automated valuation model (AVM) or by sending a valuer to visit the property.

An AVM uses sales data and house price indices to estimate the value of your home. In today’s market this means working out how much the price has fallen by since you purchased it or since it was last valued.

Halifax has been singled out for criticism recently for using an internal house price index that typically assumes that prices have fallen farther than suggested by the index it publishes every month. Ashley Brown, of Moneysprite, the mortgage broker, says: “There is evidence that Halifax is taking a much more conservative view of house prices on properties that it has already lent on. It appears to be down-valuing customers’ homes to push them into costlier loan-to-value tiers.”

A down-valuation is damaging because it can reduce the amount that a homeowner can borrow — or push up the cost. A borrower taking out a £75,000 mortgage on a home worth £100,000 can apply for a deal with a maximum loan-to-value (LTV) ratio of 75 per cent. If the lender thinks that the house is worth only £80,000 and refuses to lend more than 75 per cent of the value of the property, the borrower will be offered a loan of only £60,000, leaving a hefty shortfall that he or she will have to make up.

If the mortgage lender does allow the homeowner to borrow £75,0000, he or she will have an LTV ratio of about 90 per cent, making it considerably more expensive.

Melanie Bien, director of Savills Private Finance, another broker, says: “Lenders’ valuations often do not take into account an individual property’s location, condition or whether there have been any home improvements. It is all very arbitrary. Often, a surveyor won’t set foot inside the property, so it is difficult to argue if the borrower considers the valuation to be unfair.”

There are limited options available if you are the victim of a down-valuation by your lender. Customers who believe that they have been penalised unfairly usually need to provide two separate pieces of evidence to back up their claim, such as a recent sale in the preceding three months. A customer could also pay for a second valuation, typically costing about £200.

Andrew Montlake, of Coreco, another broker, says: “You can always go for a second opinion, but it will cost you. A lender would prefer you to instruct one of its own preferred surveyors to come round and perform a second valuation.”

It is wise to check with two or three estate agents in your area to ensure that there is comparable evidence that the property is worth what you think before pushing for your property to be revalued.

Soaring fixed rates
In the past fortnight lenders have pushed up rates on fixes for the first time in months, reflecting higher wholesale borrowing costs.

This week Cheltenham & Gloucester, Halifax and Abbey all raised their fixed rates by between 0.5 and 0.7 percentage points. The average five-year fix has jumped from 5.51 per cent to 5.64 per cent in the past two months, according to Moneyfacts.co.uk.

The cheapest five-year fixed-rate deal currently available is from the Post Office, with a rate of 4.45 per cent. It carries a fee of £599 but is only available to borrowers with a 40 per cent deposit.

Mortgage brokers are urging borrowers to fix because standard variable rates are likely to climb quickly when the Bank of England starts to raise the cost of borrowing in an attempt to control inflation, which is expected to return at the end of this year or early next year.

Lenders may start to increase SVRs before then. This week Ipswich Building Society became the first lender since October to hit existing borrowers with an increased SVR. It raised the rate by half a percentage point to 5.49 per cent.

However, economists disagree over the timing of future rate rises, with some suggesting that the economy could remain flat — and the cost of borrowing low — for a further two years. This leaves homeowners facing a difficult decision on whether to remortgage to a historically low tracker, the security of a fixed rate or to revert to an SVR.

More than two thirds of borrowers are opting for the security of fixes, but the Co-operative Bank has reported huge demand for its best-buy three-year tracker deal, which is pegged at 1.89 points above the base rate, giving a current rate of 2.39 per cent.

David Hollingworth, of London & Country Mortgages, the broker, says: “It comes down to a simple decision: will you be able to cope with higher payments after a sharp rise in interest rates over the next year? Switching to a pricier fixed rate now may seem counterintuitive, but you are future-proofing your affordability.”

Meanwhile, customers on very low SVRs may be tempted to wait before locking into a fixed-rate deal. Ms Bien says: “Borrowers who wait until the end of the year may have to pay a little bit more for a fixed rate, but they will benefit from another six months of low variable rates.”

Affordability
Between a third to a half of applications that appear to meet a lender’s criteria are being rejected, according to brokers. Lenders are going through applications with a fine-tooth comb and continue to crack down on borrowers who have irregular credit histories or errors on their applications, making it even harder to remortgage to their desired deals.

It has been reported that even the absence of a home telephone number or a lack of savings can sound the alarm bells for nervous lenders.

Robert Sinclair, of the Association of Mortgage Intermediares, the trade body that represents brokers, says: “Lenders remain very cautious about the quality of new customers that they want to take on to their books at the moment.”

Before applying for a mortgage, it is a good idea to obtain a copy of your credit report to ensure that there are no mistakes or question marks on your file, which can derail your application. You can obtain a copy of your credit report in the post for only £2 from one of the three main credit reference agencies: Experian, Equifax or CallCredit.

FIXED RATES ON THE RISE

Northern Rock, Britannia Building Society and Royal Bank of Scotland (RBS) became the latest lenders to increase the cost of fixed-rate mortgages yesterday.

Borrowers who can put down only a small deposit have been hit by Britannia, which raised its best-buy five-year fix on up to 90 per cent of a property’s value by 0.9 percentage points. The rate has jumped to 5.99 per cent, with a fee of £599.

First Direct also increased its two-year fixes by half a point this week, to 3.99 per cent. The deals also have a large £1,498 fee. Its three-year fixes climbed by 0.4 points to 4.29 per cent, with a £998 fee. The deals are for loan-to-value (LTV) ratios up to 75 per cent.

This follows similar changes by Cheltenham & Gloucester (C&G), Halifax — both owned by Lloyds Banking Group — and Abbey, but the lenders reserved the biggest increases for five-year fixes.

C&G increased its five-year deals by an eye-watering 0.7 points. Customers who need to borrow up to 60 per cent of a property’s value are now charged 5.69 per cent.

For LTVs between 76 per cent and 85 per cent, the rate climbs to 7.19 per cent. Both deals have a fee of £995.

The three lenders also pushed up the cost of two-year fixes. Halifax raised its rates by 0.4 points. A deal up to 60 per cent LTV now carries a rate of 4.89 per cent. For an 85 per cent LTV, the rate is 6.84 per cent. The deals have a £499 fee.

The banks cite a jump in wholesale borrowing costs for the latest increases. However, brokers suggest that lenders are also trying to control the flow of applications and boost profit margins.

CASE STUDY: ‘I paid to seek a second opinion’

Elaine Anderson’s new lender valued her house at almost £10,000 less than she expected when she applied for a 3.99 per cent three-year fix with Coventry Building Society.

The 46-year-old, left, had her three-bedroom semi-detached home valued at £143,000 by her previous lender, Nationwide. A month later, however, a valuer working for the Coventry judged it to be worth only £135,000.

Ms Anderson, a specialist nurse practitioner from Birmingham, says: “I felt let down. The surveyor didn’t even come into the house.”

An adviser at London & Country Mortgages, the broker, recommended that she pay for a valuation herself, costing £200. The surveyor estimated the value at £140,000, which Coventry agreed, enabling Ms Anderson to obtain her deal.