Switching frenzy as rates drop

A summer mortgage rate bonanza has brought about a switching frenzy among applicants - but beware of extra charges that could spoil attempts to grab a bargain.

With lender after lender dropping rates on their two, three and five-year fixed rates, borrowers are now clamouring to be given the cheaper deal, despite having already received a mortgage offer.

In the past month, lenders - including Nationwide, Halifax, Skipton, Yorkshire Building Society and Portman Building Society - have slashed rates not just once but, in some cases, twice.

Esther and Neil Harvey were given a mortgage offer of 4.68% on a two-year fixed loan from the Portman Building Society. But they decided to see if they could switch to the lender's new rate of 4.48%, knowing that they might be charged an extra arrangment fee.

The couple, from Warrington, were unprepared for the lender's charge of £1,800 -5% of the £370,000 loan. Although the couple had already paid a fee of £500 they decided to go away and work out whether switching would still save them money.

"The interest saved worked out at just £1,440, so there was no point in switching," says Esther.

Eventually the couple decided not to sell their home and are, instead, remortgaging with another lender. Portman has since lowered the rate on its two-year fixed mortgage from 4.39% to 4.34%.

James Cotton, mortgage specialist at advisers London & Country, says most lenders, with the exception of Intelligent Finance, were charging a second arrangement fee for switching.

"Switching in mid application has not been an issue before but the rush of lenders now reducing rates has made many borrowers look again at the rate they are paying."

Mr Cotton points out that for some it could result in big savings. For example, someone who switched from Halifax's 5.19% rate on its two-year fixed mortgage to the new rate of 4.39% could save 0.8%. On a £100,000 mortgage this would be worth over £200 in the first year - taking into account Halifax's charge of a second £399 arrangement fee.

David Bitner, head of mortgages at Bradford & Bingley, claims borrowers were well within their rights to insist on swapping the rate. He urged people to push their lender to see if they will waive the extra fee. "In the end it may even be worth looking elsewhere if you are prepared to pay another fee."

Mr Bitner recommends: "People need to get advice, to see what kind of mortgage suits their own circumstances. If rates fall and people are locked into a five-year deal, any savings they make may be negated."

Two-year deals may also be inappropriate for some borrowers. Tanya Jackson, media relations manager at Yorkshire Building Society, says it had decided to extend the interest-rate bonanza to its 10-year fixed rate offerings.

"As much as our customers appreciate the low rate they don't want to keep re-mortgaging every two years. We are focused on giving people long-term value. We feel reducing the rates on the 10- year rate mean it is less gimicky."

Simon Tyler, at Chase De Vere Mortgages, says lenders demand the new arrangement fee because, in making the mortgage offer, they have usually assigned the borrower a tranche of fixed rate cash at the higher rate. He believes that the price of swaps, the money market mechanism that allows banks to borrow the cash to lend on mortgages, is likely to fall further.

This is because the markets expect the Bank of England base rate may fall, meaning that swap rates fall too, allowing lenders to buy more tranches of fixed-rate cash at a lower cost.

"Swap rates are very sensitive to expectations - when it became obvious that the Bank of England would probably cut rates in August's meeting, swap rates plummeted, leading to the most recent spate of cut-price fixed-rate deals ," says Mr Tyler.

So a rise in unemployment, lower economic growth and falling house prices could result in more rate cuts and, possibly, cheaper mortgages.