Yeh, yeh, yeh: rates reach record low

Homeowners with variable or discount mortgages will enjoy further cuts in their monthly payments after most big lenders this week cut their mortgage rates by 0.25% following the Bank of England's decision to cut base rates from 5.5% to 5.25%.

The Bank has cut base rates three times this year and standard mortgage lending rates for new customers now stand at their lowest for almost 40 years. A homeowner with a £60,000 interest-only mortgage will be £12.50 a month better off, according to the Nationwide building society.

The last time mortgage rates were this low it was 1962 and the Beatles were recording their first hits.

Halifax, Nationwide, Abbey National and HSBC were joined by Cheltenham & Gloucester, NatWest, Northern Rock, Intelligent Finance, First Direct and Egg in cutting their rates by the full quarter percentage point. Barclays and Royal Bank of Scotland were unable to say if the full rate cut will be passed on to customers.

Some building societies also said a decision must wait until at least next week. Norwich & Peterborough building society was typical. A spokeswoman said: "We will look at how the market reacts before we make our decision."

Savers at most institutions are likely to be victims of further falls in rates but announcements are not expected until later in the month.

Intense competition in the mortgage market has also contributed to the recent decline in mortgage rates. Many lenders have created new variable rates with the aim of offering new and some existing customers more attractive mortgages.

Halifax, for instance, said this week that its new "variable mortgage rate" will be cut from 6.50% to 6.25% with effect from June for new customers. Borrowers who are languishing on the old "standard variable rate" can also switch to the new mortgage rate.

But any customer who currently holds a discount or capped rate mortgage is stuck with the old standard rate as the benchmark for whatever product they have bought. While the standard rate has also dropped a quarter percentage point - from 7.50% to 7.25% - it remains a full percentage point higher than the new rate.

In some cases the difference between the old and new rates is the same as the discount attached to an existing mortgage.

HSBC and the Nationwide building society have also split their standard rates for new customers from their old rates. All three companies have faced a barrage of complaints.

Some of them are being investigated by the Financial Services Ombudsman and others by the Consumers' Association. The Office of Fair Trading has handed the matter over to the Consumers' Association.

Customers say they have been conned. They believed their monthly payments would fall in line with cuts in variable mortgage lending rates. When these three companies cut their variable rates by a full percentage point earlier this year, customers with discount products thought their mortgages would benefit. They missed out after they were told that the old standard rate still applied to them.

Neither the Financial Services Ombudsman nor the Consumers' Association would comment on the cases. A spokeswoman for the Consumers' Association would only say that discussions with the lenders had taken place.

For homeowners looking to remortgage or move house, the picture could not be rosier. And for first-time buyers there are some good deals around.

The Halifax is offering a two-year discount tracker that shaves 0.3% off the Bank of England base rate. That leaves a customer paying 4.95% interest. There are no redemption penalties during the life of the deal and arrangement fees have been waived. The only catch, and it is a common requirement on the very best deals, is that the loan doesn't exceed 75% of the property's value.

Siobhan Hotten, of mortgage adviser Charcol, says a gap has opened up between those deals for people who have substantial equity in their home and those that need to cover most of the cost of buying a home with a loan.

"We are starting to see dual pricing in the market," she says. Lenders feel more comfortable offering the lowest rates to customers who take on part of the risk of falling home values.

Ms Hotten says fixed rate mortgages are also attractive at the moment. "It is hard to see how much longer fixed rate money will be this cheap, even if there is another rate cut later in the year, as people expect."

She recommends a 4.99% fixed rate until May 1, 2003 from GMAC, part of General Motors, if you only need a maximum of 75% loan to value. For anyone who needs 95% loan to value the rate inches up to 5.19%.

If the protection offered by a capped mortgage is more attractive, Newcastle building society has been offering a mortgage with a ceiling rate of 5.99% until July 31 2004.

It has the added bonus of doubling whatever rate cuts come through from the Bank of England. The result of the latest cut is to reduce the interest rate to 5.49%.

Maybe this deal signals that the Newcastle building society is not expecting too many more rate cuts in the next three years.

Latest rates

Lender Rate %

Halifax 6.25

Nationwide 5.99

Abbey National6.00

HSBC6.00

Cheltenham & Gloucester 7.00

NatWest6.99

Northern Rock6.99

Intelligent Finance6.00

First Direct6.00

Egg5.99

Rates are for new borrowers