Rate cut relief for mortgage payers

Published on Saturday 8 November 2008 16:43

HOMEBUYERS will this weekend be celebrating tumbling mortgage rates after the Bank of England slashed borrowing costs by 1.5%, wiping nearly £100 monthly off the cost of a £100,000 mortgage.

Borrowers with tracker loans felt immediate relief from the rate reduction. Elsewhere, Lloyds TSB and Abbey were the first to announce they would be passing on lower mortgage bills to standard rate borrowers, pushing Lloyds' rate down to 5% and Abbey's to 5.4%. Bradford & Bingley also reduced the cost of some of its loans.

Nationwide, Royal Bank of Scotland and the HBOS Group have also cut their standard rates by the full 1.5%. Nationwide's new 4.69% mortgage costs someone with a 100,000 repayment mortgage nearly 90 monthly less than a month ago, reducing the bill from 655.97 to 566.67.

Similarly, Halifax's new 5% charged across the HBOS Group reduces the monthly cost of that same 100,000 repayment loan from 683 to 591. RBS and NatWest's standard rates fall from 6.69% to 5.19%. Scottish Widows has also cut to 4.99%, and Northern Rock to 5.84%.

But the initial response of the banks was not encouraging. Before the big beasts were hauled over the coals at a meeting with Chancellor Alistair Darling on Friday, it was not clear they intended to cut at all.

Indeed, in the immediate aftermath of the Bank's shock announcement, lenders rushed to push up their prices by withdrawing virtually all the tracker mortgages on the market.

Two years ago you could buy a tracker at 0.25% below base. Those lucky enough to have bagged such a bargain are now laughing as they watch their repayments fall to 2.75%.

But the expectation is that if and when lenders reintroduce trackers, the price could be much higher: anything up to 2.5% above base rate.

No wonder everyone talks about greedy banks. During the last recession, lenders did everything they could to protect vulnerable borrowers. When base rates reached 15% in 1989, many building societies pegged their rates at 12.5% in an attempt to shield homebuyers and stave off repossessions.

But current fixed mortgages, hovering typically around 5.5%, hardly look like a steal. The expectation is that these too still have further to fall, so borrowers are advised against rushing in.

For those who have to secure a mortgage or are looking to remortgage, the best deal on the market this weekend is probably HSBC's base rate tracker, which charges 0.99% above base rate, giving a current pay rate of 3.99%. However, you need a 40% deposit and will be charged a 799 fee.

An HSBC spokesman said: "Business is flooding in at two or three times normal levels, but we are doing everything we can to keep this offer open as long as possible."

Otherwise, John Postlethwaite, a mortgage adviser at Punter Southall, advises borrowers looking for a good deal to hang fire for a few days.

He said: "After the initial euphoria we just watched as lender after lender withdrew their trackers. Right now I'm not sure there is a mortgage deal out there I would be happy to recommend.

"But I suspect the picture will become clearer in a few days, when lenders have had more time to reflect on their position."

There was some good news for borrowers: the London Interbank Offered Rate (Libor), which is the interest banks charge each other and which they say mortgages are linked to, did fall sharply. Although still some way ahead of base rate at 4.49%, it is now moving in the right direction by leaps and bounds.

Similarly, Darren Cook, a mortgage expert at Moneyfacts, predicts: "We will see a lot of announcements from lenders during the coming week. The size of the cut took them by surprise. They've had to go back to the drawing board again."

Depositors will suffer as options dwindle

SAVERS will bear the brunt of the rate cut, with opportunities to lock into attractive returns disappearing fast over the weekend, writes Teresa Hunter.

Although few institutions have announced rate cuts across the board, many have withdrawn their fixed rate products. On Friday, Anglo Irish was poised to slash interest on its one-year bond from 7.05% to 5.5%.

All eyes are on the remaining fixed rates, which are also expected to be withdrawn over the next few days. The private bank Close Brothers is still taking deposits of more than 10,000 and paying a fixed return of 7% for a year, while Saga will peg your rate at 6.9% for six months and Birmingham Midshires at 6.8%.

It is also worth remembering, though, that Saga and Birmingham Midshires are both covered by the HBOS banking licence, so investors' savings would only be protected in the event of failure up to the first 50,000 across the whole group.

The smaller society, National Counties, has also launched a one-year fixed bond paying 6.3%.

Until inflation starts to crumble, National Savings & Investments' index-linked certificates look attractive. These are tax-free and currently pay 1% over the Retail Prices Index of 5%. Savers can pocket 6% tax-free, which is worth around 7.5% to a basic rate taxpayer and 10% to a higher rate taxpayer. NS&I certificates have the added advantage that, although they are three or five-year accounts, money can be withdrawn after the first year without loss of index-linking or interest.

Elsewhere, consumers should always use available savings to reduce debts, particularly credit cards and other personal loans. Despite mortgage rate falls, reducing the size of the home loan can also make sense, if you can afford to lock the money away for good.

Those with offset loans will be quids in, as they will be best advised to offset their savings against their mortgage borrowings, which also gives them a tax-free return.

Meanwhile, the Scottish Building Society has announced the launch of its Affinity Account, through which savers can help raise funds for Diabetes Scotland.

The Society will donate 1% of the average balances held in deposit each year, with a guaranteed minimum donation of 2,000 the first year plus a further 5 per account opened for the first 200 accounts.

Jane-Claire Judson, Scotland director of Diabetes UK Scotland, said: "We are delighted to have the support of the Scottish Building Society through the launch of the Affinity Account. Through this savings scheme, savers will directly help our diabetes research and care projects in Scotland."

&#149 Compensation has come a step closer for Icesave customers after the Government announced it will lend 800m to the Financial Services Compensation Scheme (FSCS) to help depositors with savings in failed Icelandic bank Icesave.

The bank, owned by Landsbanki, closed in October, leaving 230,000 customers without access to savings.

E-mails are being sent out this week from the FSCS, explaining the refund process to the bank's UK customers.

Refunds will be given in batches over the next three to four weeks, with the cash arriving five days later. Some investors may have to wait nearly five more weeks before getting their cash back.