Borrowers hold on to discounts

Borrowers are choosing discounted rate mortgages that could increase in cost rather than fixed-rate loans, despite the expectation of further hikes to the base rate.

Many borrowers with variable-rate mortgages saw their monthly payment increase by 0.25 per cent last week as lenders moved their rates up in line with the rise in the Bank of England base rate to 3.75 per cent.

Nationwide moved its base mortgage rate up by 0.35 per cent, but a spokesman said that, at 4.89 per cent, it was still charging 1 per cent less than most other mainstream mortgage lenders.

But although a further 0.25 per cent rise is expected before Christmas, David Hollingworth of Bath independent mortgage broker London and Country says many of his firm's clients are considering discounted variable-rate mortgages because they are cheaper.

'Fixed rates have risen very fast in cost - deals on offer now already price in this week's base rate rise and anticipate another before Christmas. You are paying a premium of about 1 per cent to fix your interest rate now.'

However, Simon Jones of London independent mortgage broker Savills Private Finance says those who opt for discounted rates should make sure they can afford to pay bigger monthly repayments if interest rates rise.

'The 0.25 per cent increase only adds about £15 to the monthly cost of a £100,000 repayment mortgage,' he says, 'but if rates go up repeatedly it could start getting more expensive to manage.'

Britannia Building Society is offering the cheapest two- and three-year fixed-rate deals, 3.99 per cent for two years and 4.54 per cent for three (application fee £399, no penalties after fixed period). But funds are running out fast and the deals are likely to be withdrawn tomorrow afternoon or on Tuesday. The best deal of the week is offered by the Leeds and Holbeck Building Society, with loans fixed for five years at 4.99 per cent, with an application fee of £199 and no penalties at all during the fixed period.

Borrowers who could afford to pay more if interest rates do rise again can save money in the meantime by going for a Staffordshire Building Society mortgage discounted by 2.39 per cent (arrangement fee £300, penalties during discounted period). This gives a current interest charge of 3.05 per cent, although this is likely to rise soon. The latest rates we have are on page 12.

For those that want to have their cake and eat it, mortgage lender Giraffe (a subsidiary of the Bristol and West) is offering a combined discounted and capped-rate loan. The cap is set at 4.29 per cent for two years, preventing the rate charged moving above this level, while the discount is 2.05 per cent, giving a current payable rate of 3.49 per cent. This has an arrangement fee of £299 and penalties during the capped and discounted period.

Consumer probe into doorstep lending

The National Consumer Council is launching an
investigation into so-called 'doorstep lenders'.

The NCC , supported by the Joseph Rowntree
Foundation, will examine how the market for
home credit is shared between the main players -
Provident Financial, Cattles, S&U and London
Scottish Bank - whether there are barriers
preventing borrowers switching between different
doorstep lenders, what alternative forms of credit
are available in this market, and whether the
charges are kept consistently high.

Doorstep lenders are frequently accused of
charging extortionate rates.