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Homeowners spared interest rate hike

Published 06th Sep 2007

Homeowners breathe a sigh of relief as the interest rate is kept on hold for the second consecutive month.

The Bank’s Monetary Policy Committee (MPC) opted to hold the base rate at 5.75 per cent as a caution amid turbulence in financial markets and signs of easing inflation, according to industry analysts.

But the question on every homeowner’s lips is what to do next.

House prices are continuing to rise, though the rate of growth has slowed considerably and now many lenders are reviewing their mortgage rates as higher base rates begin to impact.

David Newnes, managing director of estate agent Your Move, said: “House price inflation is finally showing real evidence of slowing. Five base rate rises this year are clearly having the desired effect.”
Inflation in the housing market is finally cooling as the five interest rate hikes take their toll, making this the best time for homeowners to consider shopping around to find a better mortgage deal.

Which mortgage is best?
This depends solely upon your circumstances and how comfortable you are with the amount you are borrowing.
Fixed rate - the rate of interest you pay is the same throughout the period of the fix - for example, 5.50 per cent for three years - so you know exactly how much your mortgage will cost for a given period.

The risk is that rates on variable-rate mortgages may fall below your fixed rate, and you will find yourself paying more than other borrowers. However, a fixed rate allows you to budget confidently.

Discount mortgages - the lender's SVR is reduced by a set percentage. For example a 2.00 per cent discount on a variable rate of 6.50 per cent means you pay 4.50 per cent for the offer period.

If the SVR changes, so does the rate you pay, although you'll always be paying 2.00 per cent less during the discount period.

Lenders are increasingly offering stepped discounts where the margin between the SVR and the pay rate decreases after a set period.

Base-rate trackers - the rate you pay is at a set margin above the BBR and moves up and down as the base rate changes.

This can be appealing because you know that when the rate is reduced, your monthly payments will go down. On the flipside, when interest rates are rising you can be sure the monthly cost of your mortgage will also go up.

Some tracker mortgages have caps, so you know the cost won’t rise above a certain level (see capped rates).

As well as choosing what type of pay rate you want on your mortgage, you will need to consider if you want the following features:
Flexible mortgages - flexible mortgages give you more control over how you pay off your mortgage.

There are a number of features you can expect on a fully flexible loan: the opportunity to make overpayments, the facility to underpay and take payments holidays and the chance to drawdown money that you have overpaid.

Most flexible mortgages will also have daily interest calculations so you get the benefit of any overpayments straight away.

Current account and offset mortgages are the ultimate in flexible mortgages. Your current account and/or savings are linked to your mortgage and any money you hold in them reduces your mortgage debt and the interest payable on it.
By Jennifer Lowe

Source: ' What Mortgage '

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