Happy Days For Homeowners
If you're about to take out a mortgage, don't hang about. The recent Base Rate cut means if you snooze now, you may lose your opportunity to bag a bargain-rate mortgage deal....
It's been a hard year for mortgage borrowers.
First, prices rose by an average of £100 a day in the six months leading up to July, making the situation for first-time buyers even more desperate than ever.
Then, the US sub-prime mortgage crisis caused massive fall-out in the global money markets, leading to the infamous `credit crunch' and Northern Rock fiasco.
Homeowners were then hit hardest by the resulting drop in consumer confidence: last week, Halifax reported that annual house price growth had almost halved since August, dropping from 11.4% to 6.3%. And in the background, interest rates have steadily been increasing, with mortgage borrowers on variable rates forced to cough up an extra £801 a year on average.*
But finally, finally, finally, last Thursday, there was some good news for mortgage borrowers. The Bank of England announced a 0.25% drop in its base rate! At last!
Of course, as my colleague Cliff D'Arcy pointed out in Most Homeowners Won't Get A Rate Cut, many mortgage borrowers nowadays are on fixed rates so won't feel the benefit of this cut in the base rate. Others will be coming to the end of cheap two-year deals, with rates at 4% or less, so will suffer `payment shock' when they remortgage.
But enough doom and gloom, I say! Let's look on the bright side and try to think positive. If you are about to take out a new mortgage, what does this cut in the base rate mean for you? How can you take advantage of it and ensure you get the best possible deal? What impact has it had on mortgage products -- and, most importantly, should you now go for a tracker, instead of a fixed rate?
Trackers, Discounts and Fixed Rates
Trackers are the best type of mortgage deal to go for if you want to be certain to benefit from the drop in interest rates and any further cuts that may come in the months ahead.
This is because a tracker tracks the Bank of England Base Rate at a set distance, so your mortgage rate and your mortgage payments are guaranteed to fall immediately after the base rate falls (and to rise after it rises).
By comparison, a discount mortgage -- which offers a discount off the lender's Standard Variable Rate (SVR) -- may not reflect a change in the base rate immediately. It depends how quickly the lender responds to the base rate cut. Some lenders, such as Halifax and Nationwide, have already lowered their SVR following the base rate cut, but many others are quietly pretending nothing has changed just yet. ("Sorry? What did you say? Base Rate Cut? Umm... sorry, don't think I've quite got my head around what you said, could you repeat that?")
But before you decide on a tracker: a word of caution. If you have a tight budget, then a fixed rate is still likely to be a much better option for you. This is because, with a fixed rate mortgage, your payments are fixed at a set amount each month, and will not be affected by changes in interest rates. There is always a risk with a tracker or a discount mortgage that your payments will go up, instead of down, but if you opt for a fixed rate, you protect yourself from this risk.
The State Of The Market
OK, so you know the difference between a tracker, a discount and a fixed rate and the relative merits of each. But which is the best type of deal to go for, right now? What are the best products available on the market?
The first thing to bear in mind is that if you want a tracker, you'd better act fast. The base rate cut was announced at noon on Thursday. By 6pm on Friday, Cheltenham & Gloucester had pulled their market-leading lifetime tracker. The next best lifetime tracker, Hinckley & Rugby's Base Rate plus 0.24%, has a pretty similar rate - but is around £1,000 more expensive in terms of fees.
Over the next few weeks, this trend is set to continue, as trackers become less and less competitive. Why? Because, as the base rate has started to fall, trackers are likely to become more popular -- which means most lenders will probably price them less keenly, knowing there will still be a high demand for this type of product.
So while today, you can get a two-year tracker at 0.01% below base rate from the Co-op, in a few weeks' time, you may not be able to do so. In fact, the gap between the base rate and the tracker rate is set to widen over the next few weeks, according to brokers at The Motley Fool Mortgage Service. So if you want to bag a bargain tracker at a pre-base-rate-cut rate, don't hang about!
By contrast, fixed rates are likely to become less popular. So if you want this type of deal, you might be better off waiting a couple of weeks to see what happens. Hopefully, in order to compete with the more popular trackers on offer, lenders will start to lower their fixed rate deals.
If you want to hedge your bets, you could opt for a tracker with Nationwide, which allows you to 'switch and fix'. Such deals mean you can move between a tracker and a fixed-rate, without having to pay any penalties.
Finally, here's a quick overview of some current mortgage deals to help you make a decision:
Fixed until 28/02/10
Fixed until 30/11/10
BoE -0.01% for 2 years
For 2 years
1.79% discount for 2 years
For 2 years
Yet to change SVR
Fixed for 5 years
For 5 years
Hinckley & Rugby
BoE +0.24% for term
Offset. Capped at 5.99% until 30/06/10
BoE -0.01% for 2 years
For 2 years
BoE +0.60% for 2 years
Professional / Graduate. Refunded valuation
=BoE for 3 years
For 3 years
Higher Lending Charge from 90%. Free valuation
Fixed until 31/01/11
Fixed until 30/11/12
Professional / Graduate / Key worker. Refunded valuation
Bristol & West
Fixed until 31/12/12
Parental income can be used
Visit The Motley Fool Mortgage Service to find out more about these deals.
Good luck bagging that bargain rate, and here's hoping next year is a bit more positive...
*Applies to borrowers who move from a 5% interest rate to a 5.75% interest rate, borrowing £150,000 over 25 years on a repayment basis.