Lenders hidden door

1. Government banks are quietly offering much better deals to homeowners in negative equity than to new borrowers with larger deposits.

Lloyds-owned Halifax, which is backed 40% by taxpayers, and NatWest, part of the Royal Bank of Scotland (RBS) group, which is 70% owned by the taxpayer, are providing mortgages that are about 1.5 percentage points cheaper than their normal range to customers whose outstanding loans are more than their property value.

Until now, the perceived wisdom was that homeowners with the biggest deposits were given the best deals. However, customers at Halifax who owe 120% of the value of the property can secure five-year fixes at 5.64% with a £1,249 fee, but only if they ask. This compares with 7.09% for new customers with a 10% deposit and 5.91% for a buyer with 15%.

Analysts said the negative equity offers were a symptom of banks’ desperation to keep arrears and repossessions under control. Halifax, in particular, has had thousands of customers in negative equity coming off fixed-rate deals. The number of its borrowers three months or more behind with their payments leapt 60% last year to 2.68% of the loan book, or about 50,000, compared with 1.67% in 2007, and the situation is expected to get far worse.

Last week a former Halifax Bank of Scotland executive revealed that 80% of mortgages lent by the now-defunct group were accepted without proof of income. The Bank of England also said last week that the risk of defaults was preventing banks from lending more, despite having received billions of taxpayers’ cash. “Lenders expect write-offs to increase if unemployment continues to rise,” it said.

However, brokers said that “good” borrowers were paying the price of the banks’ past bad lending. Ray Boulger, of John Charcol, said: “You won’t find these deals in the best buy tables or on comparison sites, but lenders are having to offer their best deals to customers who have fallen into negative equity after years of high loan-to-value lending.”

Halifax publishes deals for existing borrowers on its website but says the maximum loan is 95% of the property value.

A Halifax customer in negative equity with a £200,000 loan would be £242 a month better off than a new customer with a 10% deposit borrowing the same amount, and £197 better off than someone with a 15% deposit. Halifax said: “It is important that we offer a range of options to customers coming to the end of their deal.”

NatWest commented: “We help existing customers and non-customers who are looking to remortgage.”

How to get the best rate

Existing homeowners with a large amount of equity in their homes are losing out to first-time buyers and those in negative equity as mortgage rationing distorts the market. You may also be better off going direct to a lender rather than using a broker.

Michelle Slade of Moneyfacts, the financial data firm, said: “We have seen more lenders offering their better deals to those buying a home. They are doing their best to help ignite the property market, but existing homeowners are at a disadvantage.”

We offer some advice.

Should I bother with a broker?

Last week, lenders such as Cheltenham & Gloucester, Northern Rock and Woolwich rushed to pull their two and five-year fixes for borrowers who use a broker. By Friday, the best rate available through brokers was from Britannia building society at 4.99%. Repayments would be £90 more a month than with the best five-year fixed rate available direct from the Post Office at 4.45%.

Brokers such as L&C Mortgages say they will always tell you if a better deal is available direct, but it is worth checking.

What’s happening with fixes?

Brokers are urging those on low variable-rate deals to avoid two-year fixed-rate deals as these will be coming to an end just as interest rates are likely to begin rising rapidly. Economists at Morgan Stanley, the investment bank, believe Bank rate, currently 0.5%, could be as high as 3% by the end of 2010. Those looking to buy now are being advised to put at least part of their loan on a fixed-rate. Before rates rise, Abbey last week raised five-year fixed-rate deals to 5.19% from 4.79% for borrowers who are remortgaging with 30% equity.

Can I get a secret deal?

Nationwide will also offer special deals to existing customers with at least 5% equity in their home. According to David Hollingworth of L&C, you may also be able to negotiate with Alliance & Leicester and Abbey to get a better deal.