We Know Property

By John Myers, head of mortgages, moneysupermarket.com

There’s been little in the way of good news for borrowers over the past few months. However, in the last couple of weeks a number of the major lenders have reduced mortgage rates, so could we at last be seeing a glimmer of light at the end of the tunnel?

Woolwich, Barclays’ mortgage arm, announced a second tranche of cuts in the space of two weeks by slashing as much as 0.32 points off some of its deals. Its 10-year fixed-rate mortgage has fallen by 0.32 points to 5.94% while its three-year fixed deal has fallen by 0.2 points to 6.29%. Its five-year fix has dropped by 0.1 points to 6.29% and it has launched a new lifetime tracker at 0.69 points above Bank rate, giving a current pay rate of 5.69%.

And Woolwich isn’t the only provider to have cut rates. Halifax Bank of Scotland (HBOS), the country’s largest mortgage provider, has also reduced rates for the second time in as many weeks. Halifax reduced 20 of its existing fixed rate deals, while other lenders under the HBOS banner also slashed rates - Intelligent Finance has reduced 15 of its 22 tracker products by as much 0.3%; three out of the 11 Bank of Scotland self-certification trackers have been cut by 0.1%; and three out of BM Solutions’ seven buy-to-let products have been cut by up to 0.2%.

 Nationwide also cut the prices on some of its fixed and tracker deals by as much as 0.46%. It cut its popular two-year fixed-rate loans by 0.3%, with three-year and five-year mortgages dropping by 0.12% and 0.17% respectively. Cheltenham & Gloucester meanwhile, owned by high street bank Lloyds TSB, cut the rates on its two-year loans from between 0.1 and 0.15 points, while Abbey cut rates on some of its fixed rate and tracker deals by as much as 0.2 points. Other lenders to have cut rates include ING Direct, which has slashed fixed rates by up to 0.4 percentage points and Yorkshire building society.

Why is there suddenly so much activity?
The reason for all this movement in the mortgage market is that swap rates, to which the pricing of fixed-rate mortgages is linked, have been falling.

Andy Gray, head of mortgages for Woolwich, said: “We have seen an improvement in the swap rates recently and have taken the opportunity to reduce our longer-term fixed rates where we see customers can get the best value at the moment.”

Despite the positive movement it would be wrong to assume that the mortgage crisis is over. Rates may be falling slightly but providers are still very cautious about who they will lend to.

The main beneficiaries of the recent rate reductions are those with large deposits. Woolwich’s new 5.69% lifetime tracker for example, is only available to those with a deposit of 40% or more.

Consequently life is still tough for first-time buyers and those who bought in the last few years with little or no deposit and who are needing to remortgage. In fact, some mortgage rates are still on the up.

While Nationwide has cut most of its mortgage rates, it has increased the cost of a few deals available for loans up 95% of a property’s value. The rate on its three-year tracker, with a £599 fee, has gone up from 6.34% to 6.44% for loans between 90% and 95%.

With house prices still falling, some analysts warn it could take years for the mortgage market to get back to normal and even then, rates are likely to be more expensive, relative to Bank rate than they were before the onset of the credit crunch.

What should you do now?
If you’re coming to the end of a fixed-rate deal, the temptation may be to hold tight and see if rates fall further.

However, the chances are you will move onto your lender’s standard variable rate (SVR) and with SVRs between 7% and 7.5%, the extra you will have to pay each month could well cancel out any potential saving of a lower rate in a few months’ time. It is therefore advisable to get the best possible deal for your circumstances now and avoid paying the SVR.

The mortgage you go for will depend on a range of circumstances including whether or not you want the security of a fixed rate or are happy to take the risk of a tracker or discount; the size of your mortgage and length of the term; and also things such as whether you expect your circumstances to change.

If you want the security of a fixed rate, Leeds Building Society has the most competitive rate at 5.75% until August 31, 2010. This deal is only available on loans up to 80% of the property’s value and does include a high 3.0% booking fee. Chelsea Building Society offers a competitive two-year fixed deal on loans up to 75% of the property’s value at 5.95% with a lower fee at 1.5%.

However, depending on the size of your mortgage, you may be better off going for a deal with a slightly higher rate but a flat rate fee.

Newcastle Building Society offers 5.95% on loans up to 75% fixed for five years with a £1,498 fee; while First Direct offers the same rate on a three-year fixed deal for loans up to 80% of the property’s value with a £598 fee. If you’re willing to lock yourself into a long-term deal, then Woolwich has the leading 10-year option, offering 5.94% on loans up to a value of 60% with a £995 arrangement fee.

Once you have decided how long you want to fix for, you need to work out the total cost of the mortgage products you are comparing, including all fees, in order to establish which deal offers the best value. A mortgage comparison service can do this for you, but if you should speak to a financial adviser.

While many people like the security a fixed rate offers, others prefer to take a bit more risk and opt for a variable rate and certainly at the moment, discounts and trackers are priced very attractively.

HSBC has the market-leading discount at 4.99%. However, this carries a high £2,499 fee - such a high fee may make other deals more appealing. Woolwich offers the market-leading lifetime tracker at 5.69% on loans up to a value of 60% with a £995 arrangement fee. Be warned though, this deal carries an early redemption charge (ERC) for three years, so you will have to pay a penalty if you redeem your loan within that time.

It is quite unusual for lifetime trackers to carry such penalties - most are ERC-free making them a popular choice with borrowers looking for maximum flexibility. If you want a penalty-free deal, Woolwich has another lifetime tracker with a slightly higher rate of 5.89%. This is also available for loans up to 60%, but as well as having no ERC, there is no arrangement fee.

If you have a deposit of just 10% your options are more limited but there are still deals out there.

HSBC offers a two-year discount rate at 5.49% with a £999 arrangement fee, while Norwich & Peterborough has a similar deal at 5.70% with the same fee. The leading lifetime tracker for loans up to 90% of the property’s value is available from First Direct at 5.99% with a £399 fee; while Skipton Building Society offers the most competitive two-year fixed deal at 6.19% until October 31, 2010, with a £1,098 fee.