Rates at record low for home loans

THE starting gun has been fired for homeowners looking to cut bills by remortgaging, after home loan rates plunged to an all-time low, according to financial information specialists Moneyfacts.

Homebuyers have been pocketing a mortgage windfall since the financial crisis triggered a sharp collapse in borrowing costs. Base rates were cut to 2 per cent by December 2008, before hitting 0.5 per cent in March 2009, where they have remained.

By the end of this year, big borrowers with £250,000 home loans will have typically saved nearly £15,000, while even those with smaller property debts of £50,000 will be nearly £3,000 in pocket.

And the news just gets better for homebuyers. In recent weeks, mortgage rates have plunged to a new nadir, with two-year trackers down to 3.37 per cent on average, and two-year fixes averaging 4.32 per cent.

Ray Boulger, a mortgage broker at John Charcol, said: “There are a number of factors pushing rates lower. Firstly, concerns that we could be in for a base rate rise soon have now receded, which has driven down money market rates.

“But on top of this, lenders have started to make their deals look more competitive in an attempt to encourage borrowers off their standard variable rates and onto new deals, amid concerns that if interest rates were to rise sharply, some customers could find themselves facing repossession.”

Moneyfacts spokeswoman Michelle Slade recommended borrowers take a hard look at the deals around, as these are the lowest since the company launched in 1988.

She said: “Lenders appear to be applying cuts equally across all the tiers, which is good for first-time buyers as previously cuts were only being applied to the lower bands. If borrowers delay too long to secure a new mortgage deal, they could find that they miss out on some of the lowest rates ever seen.”

But how long can the base rate continue at this level? According to Boulger, the question is not whether they will rise this year, but whether they will rise next year.

He said: “Everything will depend on what happens with the Greek default, because one way or another they will default, and how badly our banks will be hit.

“If this sets off another chain of contagion, like Lehman’s collapse, then money markets will freeze again. The mortgage famine could return.

“In that case, rates will have to be kept low for a very long time, although by then remortgaging will be more problematic.

“Hopefully, it will be managed much better than when the banks pulled the plug last time, in a way that this time the markets have time to adjust.”

But it is not a given that rates will stay low. Paul Tucker, deputy governor of the Bank of England, last week indicated that rising inflation could not be ignored indefinitely.

He said: “I am one of those who from the back end of last year has worried about the possibility of an upward drift in inflation expectations. The longer inflation remains so high, the more likely it is that when we say that it’s a one-off factor people will think: ‘They use one-off event in a completely different way from anyone normal’.”

Nevertheless, he implied rates should only rise when the recovery is sufficiently robust to sustain the knock, adding: “We should start to withdraw monetary stimulus once we have securely achieved escape velocity – growing at a pace that starts to absorb the slack in the economy.”

Carol Begbie, a financial adviser at Female Independent in Edinburgh, argued that, even at these low rates, rising interest will cause pain for some homeowners: “There is no doubt some borrowers will be very exposed, were interest to rise sharply. If you have a £120,000 home loan and interest rises 1 per cent, that puts your monthly costs up £90. If they rise 4 per cent, you have to find another nearly £400 monthly.

“Yet borrowers are very nervous at the moment. They are scared to move off their existing deal, even if that is a standard variable, which could leave them vulnerable.”

There is no question that consumers are generally under pressure. Real disposable incomes during the first quarter took their sharpest knock for more than 30 years, falling 2.7 per cent.

Nevertheless, some families have saved a small fortune, thanks to three years of unimaginably low mortgage bills.

By the end of the year, those on a £50,000 loan will have paid £2,850 less than they might have expected to pay, while £85,000 borrowers have been £4,845 quids-in.

At £100,000, borrowers will have saved £5,700, which rises to £8,550 for those with a £150,000 mortgage.

This money could have been used to reduce loans, thereby cutting mortgage bills, shortening the term and, importantly, protecting families against rate rises when they come. Yet fewer than one in ten borrowers are believed to have reinvested this windfall to reduce their home loan debt.

With saving rates so low, there are also few signs that the cash has been put aside for future rainy days. So where has the money gone?

Boulger said: “Perhaps some consumers have used it sensibly to reduce other debts, such as credit card balances, which are more expensive.”

But Begbie believes it is simply being used to make ends meet. She said: “Family budgets are squeezed, and this money is the only thing helping them get through the week and pay their bills on time.”