Interest rates relief on the way

Published on Saturday 23 August 2008 14:01

Signs of hope for hard-hit homebuyers are emerging at last, writes Teresa Hunter

MORTGAGE rates are set to fall, bringing much-needed relief to homebuyers as evidence mounts that the economy has ground to a halt and the UK could be headed into recession.

The gloom comes as Government property market data for July revealed such a startling drop in activity that boffins at Her Majesty's Revenue & Customs have called back the figures in disbelief.

Experts now predict the Bank of England will be forced to cut interest rates sooner rather than later in an attempt to kick-start the housing market and protect jobs.

The economy stood still between April and June for the first time since 1992, according to the Office for National Statistics, which also reported wages rising more slowly than at any time for five years.

Meanwhile, the Government's analysis of the housing market is in disarray after economists at HMRC indicated they were unhappy with a series of figures going back to 2005 in the light of a collapse in property transactions in July.

Commentators expect the Bank of England to begin cutting rates by 0.25% within the next few months, and to continue with regular 0.25% trims until the base rate reaches 4% as early as this time next year, down from the current 5%.

Some believe the slowdown will be so marked that rates will fall faster. Capital Economics predicts they will dip to 3.5% next year.

Another encouraging sign emerged for homebuyers last week with the return of competition to the mortgage market, at least for certain kinds of borrowers. Lack of competitive deals had forced many borrowers to stay on their lenders' standard variable rate when their existing deals came to an end.

Pagan Osborne adviser Robert Annand explains: "Lenders were running scared for some time, but now they are coming back into the market. Some rates have come down, and I like to think others will follow."

So with rates falling and lenders back out there fighting for customers, how can borrowers best cash in? Is the time right to make the move to a new deal or will they do better by waiting until rates and margins have fallen further?

Much will depend on what they are paying by way of a standard variable charge, as rates differ between lenders. The Halifax, for example, charges 7%, pushing the monthly cost of a 100,000 loan to 706.77.

The Skipton's standard rate is much lower at 6.45%, leaving borrowers paying 671.36 for that 100,000 loan. Similarly, the Abbey's standard rate is 7.09% and the Nationwide's 6.49%.

L&C's David Hollingworth says: "There is clear daylight between what lenders are charging."

Borrowers also have to decide whether they opt for a fixed deal, where rates look certain to have further to fall, or opt for a tracker which will follow the base rate down.

Punter Southall mortgage expert John Postlethwaite suggests that deciding when to remortgage may depend on whether you are a natural "fixer" combined with how big the equity in your property might be.

He says: "There are signs that competition has returned to the market and margins are being squeezed, but only at certain levels of equity.

"For example, if you have a 25% deposit or more and you want to track base rate then there are some good deals out there and your repayments will fall along with interest rates.

"We are seeing more competition also for borrowers with 20% and 15% deposits. But above that, borrowers looking for a 90% loan are probably still best advised to stick with the standard variable rate. These are still looking expensive."

Charcol's Ray Boulger loosely agrees, with one proviso, and that is if you wait and the price of your property falls, you may end up paying more because you have a smaller deposit.

"Certainly, if you want to fix, then I would wait, because there will be cheaper fixes around next year. But lenders are on the lookout for low-risk borrowers, and that means ones with a decent amount of equity in the property. If you qualify for that now but don't, say, in six months' time because the value of your home has fallen, then you may regret not moving your mortgage sooner."

This week Nationwide cuts its rates again, with the cheapest deals going to those remortgaging. You can remortgage for two years at 5.88% with a 599 fee, or 6.28% with no fee, but only if you have a 25% deposit. With a 10% deposit you must pay 6.33% with a fee or 6.75% without.

The best tracker rates are also only available to those with a decent deposit. To qualify for Woolwich's lifetime tracker, charging 0.69% over base, you need 40% equity in the property and a 999 fee. The same applies to C&G's 0.85% tracker, which comes with a 995 fee.

As you can see from the table on the left, while the Woolwich deal beats the current best of the fixes, assuming the base rate falls by 0.25% quarterly over the next year and then stabilises, the C&G deal is less competitive.

Both offer more expensive deals for those with a smaller deposit. Elsewhere, First Direct has launched a new fee-free offset tracker mortgage offering a rate of 0.99% above base rate for those with a 20% deposit.

I shopped around to uncover a better deal

SOLICITOR Fiona Duncan bought her flat in Edinburgh two years ago and was shocked to find that when her fixed deal ended her new monthly bill would be 200 higher, writes Teresa Hunter.

She said: "This seemed a huge increase for a one-bedroom flat, particularly when you are paying for it all on your own and there is no one else to share the bills."

She had originally opted for the Scottish Widows young professionals mortgage but decided to consult a financial adviser to see if she could do better elsewhere when her fix expired.

"Although I had opted for the professional mortgage, I had put down a 10% deposit, and the value of the flat had increased over that period, so I had a decent deposit and was in quite a good position to get a remortgage," she added.

Her mortgage adviser suggested she opt for an Alliance & Leicester deal which still meant a 100 increase in her monthly repayments, but this was half what she would have experienced had she stayed with the Widows.

She said: "I'm very glad I decided to look around, as I will be much better off as a result.

"I probably could have just about managed the 200 increase but it would have been tight and now my repayments are fixed again for the next two years.

"The whole process was completely pain-free, and the adviser did all the work.

"There were some fees to pay associated with the remortgage so I had some outlays to pay and I think some were added to the mortgage. But overall I am still better off."