Renewed interest in home loans

Homeowners around the country are no doubt relishing the fact that the roofs over their heads are costing them less this weekend, thanks to last week's 0.25 per cent cut in interest rates.

Several lenders had already reduced their standard variable rate. Nationwide building society started the trend last December by cutting its SVR from 7.29 per cent to 7.09 per cent; it was followed by several others, including the Portman, Yorkshire and, most recently, Standard Life Bank. Others, including the Halifax and HSBC, cut their SVR immediately after the Bank of England's announ-cement on Thursday.

Economists expect another small cut soon. But mortgage brokers say borrowers who really want to save money should take advantage of the ultra-low discounted, tracker and fixed-rate loans available.

David Hollingworth of Bath mortgage broker London & Country favours tracker mortgages, where the interest is set at a certain level above or below the Bank of England base rate. He prefers them to discounted loans because any change in the base rate is reflected by an immediate change in the tracker's interest rate. In contrast, discounts are linked to the lender's SVR, and as some lenders can be tardy in cutting their SVR following a base rate fall, cost savings can be delayed. And unlike discounted mortgages, tracker loans rarely have early redemption penalties.

Hollingworth recommends a Halifax base rate tracker, which is set at 0.45 per cent below the base rate until the end of 2002, giving a current rate of 5.3 per cent. The loan has no redemption penalties and borrowers can apply for up to 75 per cent of their property's value for purchase or remortgage. Remortgagers get a free valuation and legal fees.

However, Ray Boulger of London mortgage broker Charcol says borrowers should consider discounted loans if their rates are sub stantially lower than those of trackers. Charcol, for example, has negotiated special terms with the Woolwich on its Open Plan flexible mortgage, providing a discount of 3 per cent in the first year and 1.8 per cent in the second. Borrowers can repay up to 25 per cent of the loan in each of the first two years, and interest is calculated daily.

Fixed-rate mortgages are ideal for people on a tight budget who cannot afford fluctuations in their monthly mortgage payments. People in this situation may be tempted to wait for the next base rate cut before applying for a loan, assuming that cheaper fixed rates will become available.

But this is not necessarily the case, says Boulger. He explains that fixed rates are arranged on the money markets, where prices are based on future base rates, not the present one. 'This means fixed-rate mortgages tend to bottom out before the base rate. If you wait until the base rate reaches bottom, you could find fixed rates are on the increase,' he says.

Most borrowers have been interested in short fixed terms of two or three years. Hollingworth likes a Yorkshire Building Society loan fixed at 4.99 per cent for two years for buyers only. Loans worth up to 75 per cent of the property's value are available for a fee of £295, with a 5 per cent redemption penalty in the first two years.

Bank of Ireland has loans fixed at 5.49 per cent for five years on loans of £100,000 or more (5.69 per cent on smaller loans), available for purchases or remortgages. Interest is calculated on a monthly basis. There is a £280 arrangement fee, and redemption penalties in the first five years. No mortgage indemnity insurance is required for loans worth up to 85 per cent of the property's value.

And for those who want to know they can afford their mortgage for the next decade, Boulger suggests a Newcastle building society mortgage fixed at 5.99 per cent for 10 years. Although the loan normally has redemption penalties of six months' interest during the fixed period, borrowers can repay part or all of the loan without penalty provided they inform the society of their intention in March of the year they want to do it, and follow through within three months.

The Newcastle loan has a completion fee equivalent to 0.35 per cent of the amount borrowed, which can be added to the loan, plus £100 if you don't buy one of the society's buildings, contents or payment protection insurance policies.