Hallelujah! Lenders finally pass on base rate cuts to borrowers

Published 25th Mar 2009

Lenders are finally passing on base rate cuts to borrowers who want to fix their mortgages. This could provide a rare opportunity to fix your mortgage at historically low levels for years into the future.

The best two-year fixed rates have crashed from more than 6 per cent last summer to less than 3 per cent now, knocking nearly £280 a month off the cost of a typical £150,000 home loan.

But first-time buyers with a 10 per cent deposit can still expect to pay more than 6 per cent because banks and building societies only want those with rock-solid credit records.

However, five-year deals, though slightly more expensive, could be a better option if, as economists predict, interest rates start moving up again next year to contain inflation.

And 15-year mortgages at less than 6 per cent offer relatively cheap long-term stability.

Such has been the interest in switching to cheaper loans, Nationwide has blocked borrowers with more than three months to go on old expensive fixed rates from switching to a cheaper deal with them - even if they are prepared to pay a hefty penalty to get out.

Top of the pile is First Direct with a two-year fix at 2.99 per cent for those with a 25 per cent deposit with a fee of £898.

This compares with the 'best buy' 6.14 per cent offered by Alliance & Leicester in July 2008. It means monthly repayments would be £710 now rather than £979 on a £150,000 repayment loan.

But Melanie Bien, of mortgage brokers Savills Private Finance, says five-year fixes at around 4 per cent may be a better option: 'You don't want to find the rate is rising just as you're coming off a two-year fix.'

Martin Ellis, chief economist at Britain's biggest mortgage lender, Halifax, predicts that base rate will remain at 0.5 per cent for the rest of the year and only start picking up in 2010.

Nationwide's economist, Fionnuala Earley, believes the base rate could remain fairly depressed until 2012.

The danger is that when it does start picking up, it could be a rapid rise, so fixed rates will provide vital protection.

Among the best five-year deals, Abbey charges 3.95 per cent with a £995 fee for those borrowing 60 per cent of the value - monthly repayments would be £788.

The Post Office will lend at 4.15 per cent with a £599 fee for those needing 75 per cent - the monthly cost is £804.

Those who want to fix for longer could look at Britannia, which has a 15-year fixed rate of 5.94 per cent to those with a 40 per cent deposit, 6.19 per cent with a 25 per cent deposit and 6.54 per cent to those with 15 per cent to put down. Every three years, borrowers can switch to another product, overpay or redeem the loan without penalty.

Another danger lurks for those considering remortgaging: falling house prices.

David Hollingworth, of broker London & Country, warns: 'Those with big mortgages are taking a risk in hanging on for further falls in mortgage rates because their equity is being eroded all the time.

'This could push them into a higher loan-to-value tier where they will actually be charged a higher interest rate.'

But don't expect an easy ride. 'There's no sign that lenders will start competing furiously with each other - they are still cherrypicking the best borrowers and applying strict lending criteria including a good credit record and a sizeable deposit,' Mr Hollingworth warns.

Life will remain tough for first-time buyers for the foreseeable future. Their numbers dropped dramatically in 2008 to 194,200, compared with 357,800 in 2007, though lenders are reporting a slight pick-up in interest.
... but trackers look poor value

Trackers do not look such an attractive proposition now. In July, best buy HSBC's lifetime tracker was set at just 0.79 per cent points over the base rate for those with a 10 per cent deposit.

Now its sister bank, First Direct, has a lifetime deal of 2.39 points over base. For this, you need a 25 per cent deposit and must pay a £799 fee. On deals which track base rate for two years, Nationwide charges 4.58 points over base rate if you have a deposit of 15 per cent or less, putting the current rate at 5.08 per cent.

Repayments on a £150,000 loan are £884 a month and there is a fee of £995. Unlike with a fixed rate loan, your monthly payments will go up during the next two years if base rate rises.


CASE STUDY: No history, no future home

Lizzie Shaw struggled to find a mortgage even though she has a deposit of more than 25 per cent. Lizzie, 23, put in an offer on a three-bedroom terrace house in Ipswich, Suffolk, for £122,000.

She raised £46,000 from savings and a gift from her parents, so she needs to borrow only £76,000 - but this is four times her pay of £18,200. However, she expects a pay rise next month and she can earn a bonus of up to 10 per cent .

Lizzie, who works as a quality assessor for an insurer, says: 'My problem was I didn't have enough of a credit history for most lenders. I don't like credit cards and I rarely use my overdraft. It's been very frustrating.

'In the end, I went to a broker, who took some of the stress and hassle away. I desperately want to buy my own home.'

Savills found her a four-year fixed rate mortgage from Alliance & Leicester at 4.49 per cent . The arrangement fee is 1 per cent of her loan, which is £760.

Source: ' Daily Mail '

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