Mortgages on the move

Housebuyers about to take out a mortgage have been left facing a dilemma following the latest rate rise.

Borrowing costs are set to climb for millions as a result of Thursday's 0.25% base rate hike and economists expect further increases over the next few months. But the expectation is that come the end of this year or the beginning of 2001 interest rates will start falling as the UK begins to move into line with Europe.

So those thinking of taking out a mortgage now face a difficult decision. Do they go for a loan based on what we think will happen in the short term, or do they make their decision based on what the experts are predicting will happen later? "A short-term rate rise, followed by a [predicted] fall, is a tricky one for borrowers to call," says Ray Boulger at mortgage brokers John Charcol.

Despite the medium- to long-term predictions of rate cuts, some housebuyers, particularly those with tight budgets, will probably still prefer the certainty of a fixed-rate deal, he adds. With this you know exactly what your monthly payments will be and you won't suffer any nasty shocks.

Others will perhaps take the view that, even though interest rates are climbing now, it is still worth going for a discounted mortgage deal to benefit from the rate cuts which everyone seems to think are heading our way.

Just to add to the pressure on borrowers, you'll have to act quickly if you want to take advantage of the best deals currently available. "Following the move in base rates we are likely to see lots of attractive mortgage deals being taken off the market or revised," says Kevin Friend at online mortgage broker Emfinance (www.emfinance.com). Lowest fixed rates include Skipton building society, which is offering those able to stump up a deposit of 20%-plus a loan fixed at 5.45% until March 1 2002 (but you must take their buildings and contents insurance, and there is an early redemption penalty of 3% throughout the fixed period).

NatWest has a deal fixed at 5.99% until March 1 2002 which has no redemption penalties and is available to those who can only manage a 5% deposit and Britannia building society, has a mortgage fixed at 6.15% for three years (but the loan is only available to borrowers with a deposit of 25%-plus of the property's value and there are redemption penalties).

Tracker mortgages have been popular for some time. But some borrowers will be worried about going for one at a time when rates are rising. In response John Charcol is offering a combined tracker/capped mortgage, where what you pay is set at bank base rate plus 0.95% for the life of the loan, resulting in a current payment rate of 6.7%. The rate is capped at 6.99% for five years, so you won't pay any more than that during that period.

And if rates fall, of course, so does what you pay. It's available for house purchases and remortgages up to 90% of the property's value (95% for first-time buyers), but there is a redemption penalty of 180 days' interest during the capped rate period.

Perhaps the best deal on the discounted rate front is offered by the Halifax. It gives borrowers 2.25% off its standard variable mortgage rate until January 31 2002. It's available for loans of up to 95% of the property's value and there are no redemption penalties and no fee to pay.

Thursday's rate rise was the third in five months. A quarter point rise on a Halifax £60,000 repayment mortgage would mean a £9.18 increase in monthly payments from £420.26 to £429.44.

Ray Boulger anticipates another 0.25% base rate rise next month or in March, with rates starting to fall come 2001. Economists at HSBC say a further hike at February's meeting "appears likely," with base rates expected to peak at 6.5% by the end of June.

Moneyfacts says the typical mortgage rate currently stands at 7.17%, while the typical instant-access savings rate is just 1.21% net. Five years ago the differential was much narrower - the mortgage rate figure was only slightly higher at 8.11% but the typical saver was getting 3.06%, some two-and-a-half times what they are getting now.

Many commentators said the rate rise, though unpleasant for homeowners, will help to ensure that housing "hot spots" are kept in check. A survey this week from Nationwide building society revealed that these hot spots include the London boroughs of Hackney, Merton and Wandsworth, and Brighton. All four saw house prices shoot up 36%-37% last year. Close behind were Southwark and the East Sussex town of Hastings (both 34%).