Time to get your home loan right

January can be a testing time for our finances, what with the post-Christmas credit card bills landing on doormats and the temptations of the sales. So here are two bits of good news for homeowners and those planning to buy a house this year.

A cut in mortgage rates moved a big step closer this week after the United States slashed interest rates for the first time in two years on Wednesday. Many experts believe the decision could lead to the first UK interest rate cut since last February, and it could possibly come as early as next week, spelling lower monthly payments for millions of people who have discounted rate mortgages or who are on their lender's standard variable rate.

Some economists went as far as to predict the UK base rate (currently 6%) would be down to 5% by the end of the year. If this happens, and the cut was passed on in full to borrowers, it would chop as much as £50 off the monthly payments of someone with a £60,000 loan paying the typical bank standard mortgage rate, currently 7.74%.

Meanwhile, there is also good news if you're planning to take out a mortgage this year, either for a house purchase or because you're considering moving your home loan to another lender. All the evidence suggests the cut-throat competition in the mortgage market which raged most of last year, resulting in some cracking deals for borrowers, is set to continue.

"The market will maintain this competitive momentum throughout 2001, ensuring a steady stream of bargain rates for borrowers," predicts London-based mortgage broker Charcol. It says the best value can be found in two and three-year discounted rate deals.

For those people looking to remortgage, the savings you can make are potentially huge. Many people could easily chop 25% off their mortgage payments in one fell swoop - perhaps £100-£200 a month, which can add up to almost £5,000 over two years. While millions of homeowners are paying 7.74% there are two-year fixed rate deals available as low as 4.99%.

Jobs & Money asked Charcol and another mortgage broker, Bath-based London & Country Mortgages, to pick out five of the best deals around at the moment. All are available both to those buying a property and people remortgaging unless it says otherwise.

Five of the best:

1 Deep discount
The anticipated mortgage rate cuts suggest the smart money could well be going into discounted rate home loans. Britannia building society is offering a two-year discounted deal giving 2.4% off their standard mortgage rate if you can stump up a deposit of 25%-plus, or 2.3% if you can't manage a deposit that big. As their standard mortgage rate is 7.64%, that means the initial pay rate is either 5.24% or 5.34%. This deal is free of lock-in early redemp tion penalties so you can walk away at any time. There is a £195 arrangement fee to pay.

2 Can we fix it?
Many people like the security of knowing exactly what their monthly payments will be. GMAC (the loans business owned by General Motors) is offering a deal where what you pay is fixed at 5.49% for two years, until March 1 2003. It's free of redemption penalties and offers the advantage of daily interest calculation, which reduces your costs over time. But it's only available to those with a deposit of at least 25%.

3 Cap your costs
The Woolwich this week launched a new range of mortgages including one where what you pay is capped at 5.35% for two years, until April 1 2003. That means you will never pay more than 5.35% during the period but if the mortgage rate falls below this, then so will what you pay. This rate is available to anyone borrowing up to 95%, and comes with the added benefits of flexible features (you can make overpayments, etc) and daily interest calculation. There are redemption penalties within the two years and there is an arrangement fee of £195.

4 For first-timers
The Woolwich is also offering a competitive deal available to first-time buyers only. What you pay is capped at 5.99% for three years, until April 1 2004, and the minimum deposit is just 5%. There are redemption penalties within the three-year period but there is no arrangement fee to pay and again the deal is flexible and features daily interest.

5 T racker attraction
Tracker loans are growing in popularity. With these, the rate you pay follows the ups and downs of the Bank of England base rate. The Halifax is offering a tracker deal where you pay 0.45% below the base rate until December 31 2002, giving a current pay rate of 5.55%. This deal is for people who can manage a deposit of 25%-plus. For those who can't stump up a deposit that big, the discount off the base rate is 0.25%. The deal has no redemption penalties and there is no arrangement fee to pay.

You might also want to consider the findings of a survey issued by financial data provider the Research Department which reveals that mutual organisations such as building societies continue to offer cheaper mortgages than most of their banking competitors. The survey looked at the total interest paid on a £50,000 standard variable rate mortgage between January 1 2000 and 31 December 2000. It concluded that nine of the top 10 cheapest lenders were mutuals or owned by a mutual, if you exclude special deals and privilege rates offered to long-standing borrowers.

Standard Life Bank - the mortgage lending arm of mutual insurer Standard Life - came top of the value-for-money table. A Standard Life Bank borrower with a £50,000 interest-only loan on the standard rate would have forked out a total of £3,447 in interest during 2000, says the survey. This is £414 less than the £3,861 a borrower with Northern Rock would have paid, though it is only fair to point out that Northern Rock offers a lower rate to borrowers who have been with it for more than seven years. The other mutuals in the top 10 were the Nationwide, Yorkshire, Leeds & Holbeck, Norwich & Peterborough, Derbyshire, Portman, Chelsea and Cheshire building societies. The only high street bank to make the top 10 was HSBC.

For many homeowners, the best financial decision they will make this year is to switch their mortgage to another lender. The number of people remortgaging has soared to a new record as awareness increases about the savings people can make by moving to another deal.

If you're not tied into your lender's standard variable rate by lock-in early redemption penalties, you should be thinking seriously about switching. Even if there are penalties tying you in, it may still be worth paying up and moving. It's probably not going to be nearly as painful as you might imagine. Many lenders, including the Halifax, are so keen to sign up remort gage customers that they will waive many of the fees and charges.

Remortgaging has enabled John Williams to both save money and raise some extra cash to pay for home improvements. He is borrowing an extra £10,000 from his new lender, Coventry building society, and most of this is being ploughed back into his house in Chelmsford, Essex.

The 49-year-old recruitment consultant had a two-year fixed rate mortgage with Abbey National which ran out recently, and he had the choice of paying the penalty and leaving, or sticking with the bank for the next three years on their standard variable rate. After talking to a mortgage broker Mr Williams decided to bite the bullet and switch to a two-year discounted rate loan with the Coventry. Even though he is borrowing an extra £10,000, he is still saving money - his monthly payments have dropped from around £380 to £350.

Mr Williams is planning to use the cash to pay for a new bathroom, a new front door and, if possible, wooden flooring downstairs. "I've remortgaged a few times but this has been the easiest one. Years ago it was quite a lot of hassle but now it is all done for you. It is more slick and professional these days - I would recommend it to anyone."