Five in row for rate cut

Five cuts in five months - that's the good news on the mortgage front which has taken most variable rates a full two percentage points down from last October.

When lenders finally calculate the new rates, borrowers with a typical ?60,000 mortgage will find they are nearly ?100 a month better off than last autumn. And a ?100,000 mortgage customer will be more than ?160 a month better off on an interest-only mortgage.

The monthly saving for those on repayment loans is lower: ?75 on ?60,000 and ?125 on a ?100,000 mortgage. Most lenders give repayment loan holders the choice between paying a lower rate or maintaining the previous payment and repaying the loan more quickly.

But not all borrowers will benefit. Around half of all recent home loan company customers have fixed rate loans. And while many were bought when they were below the variable rate, a number will now cost more than the standard rate, let alone the best discounts on offer.

The base rate cut is likely to prompt a rush of remortgaging as borrowers try to get out of high fixed rate deals. However, many such deals carry penalties which can be as much as 5 per cent of the sum borrowed or up to a year's gross interest.

Lenders argue that customers have had the advantage of lower rates for some time; and as they had to buy the loans from the money market at a fixed rate, they will need cash to buy themselves out of those obligations.

So should borrowers stick or twist, given that most commentators believe base rates could fall further?

Most of the big banks now have a standard variable rate around 1.5 per cent above bank base rates. If the UK were to join the euro, mortgage rates could, in theory, be as low as 4.5 per cent assuming euro base rates remained at 3 per cent. However, because banks and building societies have savers to worry about too, they probably won't be willing to drop mortgage rates much below 5.5 per cent. Rates on euro-denominated loans are around that level.

Lenders also have to rebuild their profit margins and although competition for your mortgage or remortgage is rife, they are all looking for a period of stability. Lenders have traditionally used periods of low rates to push up the gap between what they charge to borrowers and what they give savers.

Patrick Bunton, mortgage adviser with London & Country Mortgages, says borrowers who bought a fixed rate two or three years ago and still have another two or three years left to run should get out now.

In October 1996, the TSB sold a five-year fixed rate at 8.84 per cent. The redemption penalty now stands at three months' interest. This loan still has 30 months to run so it is worth paying the escape fee of ?2,210 on a ?100,000 loan - if you can afford it - as borrowers can easily refix at 4.99 per cent for the next two years without a penalty lock-in period. This will produce a profit of around ?5,000 after all charges.

Many longer-term loans sold at that time, such as NatWest's 9.75 per cent, fixed until 2019, now look especially sick . But escape here could be costly. Some banks, including NatWest, charge borrowers what it costs to sell the returned money back into the money markets. This usually works out even more expensive than penalties involving a fixed number of months' interest. But it might be worth swallowing your pride and paying the 12-month penalty on the Midland Bank 8.99 per cent fix until November 2006.

The mathematics suggest that borrowers with less than 18 months of a fixed rate left should probably sit tight as redemption penalties plus the costs of setting up a new loan are likely to outweigh potential monthly savings.

Capped and discount mortgages are where most of the smart money will be heading. There are currently more than 100 capped rate products on the market - more than four times the number this time last year. "Whatever you do, make sure you go for a mortgage with no redemption clauses," advises Bunton. Among the current crop of special deals, Bunton suggests Northern Counties building society's three-year 1.4 per cent discount mortgage or the Coventry building society's five-year 1.2 per cent product, neither of which carry redemption penalties.

As fixed rate mortgages fall out of favour, lenders are scurrying back to the drawing board for new incentives. Northern Rock Direct launches a two-in-one mortgage product today which combines a discount mortgage with a personal loan for other purchases. The bank's "Together" product kicks off with a mortgage rate of 6.09 per cent and the Rock is promising that the rate will remain below the average standard variable rate of six named direct lenders until at least January 2002. After that, the rate will be guaranteed to be at least 0.5 per cent below the Rock's standard variable rate.

Up to 95 per cent of the property's value can be borrowed and borrowers can then take out a further 30 per cent of the property value as an unsecured loan on completion or at a later date. Northern Rock has been attacked in the past for its use of redemption penalties, but the "Together" product is penalty and fee-free. However, if the mortgage is repaid while the personal loan is still outstanding, the rate on the unsecured loan will increase to 3 per cent above the bank's prevailing standard variable rate.

The mortgage rate will be pegged against those offered by new entrants such as Egg, Sainsbury's, and Standard Life. But the inclusion of the less competitive Halifax Direct and Nationwide Direct means the benchmark may not be as tough as it could be.



What you could buy
A home buyer with a typical ?60,000 loan pays ?100 a month less than in October. This ?100 could buy:

Slap-up lunch for two at the Savoy

Half a dozen bottles of Champagne

Budget return air ticket to Rome

Weekend hotel break in Edinburgh

Day of pampering at the Sanctuary (women only!)

A trip in hot air balloon for two