Midweek Money: Market forces come good

Mortgage companies, with cash to spare, are on the verge of a price battle. So how do you choose the best deal?
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Good news for anyone seeking a mortgage. Building societies and banks have plenty of money to lend. So much so that there is a real threat of an imminent mortgage war that would mean even cheaper home loans being available.

"There has been an undercurrent of a price battle for most of the year," according to Colin Preston, director of DBS Mortgage Services, a nationwide network of more than 2,000 independent financial advisers. "During the first half, the big boys, such as the Abbey National and Halifax, stayed out. Now they are coming in, looking to increase their market share."

The most noticeable moves have been the decision by the Halifax, the country's largest lender, to cut its fixed and capped-rate loans by 0.85 per cent, accompanied by similar moves at the Alliance & Leicester and Cheltenham & Gloucester.

This means that a two-year fixed rate mortgage from the Halifax will now carry an interest rate of 6.95 per cent, saving pounds 64.66p a month on a pounds 100,000 loan. And a five-year fixed loan carries an interest rate of 6.95 per cent. These compare with the current standard variable mortgage rate of around 8.95 per cent available from most of the country's main lenders.

Halifax admits that it has cut the cost of its loans after losing many customers earlier this year to cheaper rivals. It is also responding to the reduced costs of borrowing long-term funds in the wholesale money market, where interest rates have fallen considerably.

Whether you are a first-time buyer, moving house or looking to remortgage - and more than a quarter of the market is now for remortgages - both the high street outlets and telephone lenders have plenty of tempting offers.

"Variable loans are the most popular at the moment," says the adviser Colin Preston. "Especially if you can get a discount for the first two or three years."

These are standard mortgages, in which the interest rate moves up and down with the general economic climate. At present, interest rates seem to have peaked. In all likelihood, they should soon begin to fall. This means that variable-rate borrowers can look forward to lower repayments.

Most lenders now offer inducements with their standard home loans, such as a reduced interest rate for a while, anything up to 5 per cent cash back, and reduced fees, if not no charges at all. These fees, including valuation, procurement charges, cost of a lawyer and mortgage indemnity insurance can add up to more than pounds 1,000.

Fixed-rate mortgages will appeal the most to those who want to know with certainty what their repayments will be during the period. No matter what happens in the economy, whether interest rates go up or down, the repayment will stay the same during the fixed term.

"Fixed rates could appeal to a couple who want to have a child, when only one partner will be working, or someone who knows they will not have any significant pay rises in the next couple of years," says Mr Preston.

"In fact, anyone who likes to know exactly how much their mortgage will cost each month."

Capped loans are similar, but give the borrower the benefit of sharing in any cuts if interest rates go down. You know what your maximum interest rate and payment will be. Should interest rates go above this level during the term of the loan, you will not have to pay any more. But if rates fall, monthly repayments will follow.

Flexible mortgages that allow you to treat your home loan as part of your current bank account and general borrowings are the latest fad. You can have your salary credited against your total loan, increase payments, pay off lump sums whenever you want, or even take a repayment holiday.

"The self-employed or those on contract work could look at these," says Mr Preston. "They will appeal most to those with fluctuating income or cash flows."

While many of the special offers now available can follow you if you decide to move home, most carry redemption penalties if you want to change to another lender, or move to a different type of repayment. These charges often remain in force for some years if you take a discount, or a year or two after the term of a fixed rate loan. The best deals carry penalties only during the life of the discount or fix.

Always remember that, on average, a home-owner can expect to move house every six or seven years, whether it's because of a change in job or just wanting different accommodation. So always look at any penalties or charges before accepting any offer.

Overall, when looking at the different types of mortgages over the 25- year term most of us take, there is not much difference in the total cost if you add up the various fees, interest charges and repayment of capital.

Having looked at some of the best fixed rate, capped, flexible and variable mortgages on offer, for a 95 per cent loan on a pounds 100,000 house, Mr Preston calculates that after adding together all the fees, interest payments and return of capital, after 25 years borrowers would pay around pounds 283,000 in total, whatever loan they chose to have.

"Remember that while an offer may look attractive, if you keep the same mortgage going to maturity, they will all cost broadly the same, no matter what type you choose. So pick the one that best suits your lifestyle," he advises.

Current Mortgage Deals

Standard variable with incentives

Britannia BS (0800 526 350) - 8.85 per cent interest rate with30 per cent of the advance repaid after 20 years.

Leeds & Holbeck BS (0800 072 5726) - 8.45 per cent interest rate with a cashback of 7 per cent of the advance that can be reclaimed in first six years.

Variable-discounted rates

Coventry BS (0345-665 522) - 4.35 per cent interest rate charged until 30 Sep 2000 or 5.95 per cent until 30 Sept 2003.

Nationwide (0800 302 010) - 6.45 per cent interest charged for three years or 7.15 per cent for five years. Redemption penalties possible.

Long-term fixed rates

Abbey National (0800 555 100) - 6.5 per cent interest rate to 2 Dec 2008.

Halifax (0800 101 110) - 6.25 per cent interest to 31 Dec 2003, redemption penalties for a further two years.

Source: `MoneyFacts' magazine