Fixed rates heading for record low

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SEVERAL lenders are expected to introduce substantial cuts in one- and two-year fixed-rate mortgage products in August and early September. Rates are heading for a record low.

Alliance & Leicester has just launched a market-leading, two-year fix pegged at 6.25 per cent. Other lenders may feel obliged to compete on this and other fixed rates.

Abbey National is expected to unveil new fixed-rate products next week. Details have yet to be announced but its senior economist, Margaret Schwarz, expects cuts of up to 0.5 per cent on the shorter fixes from a number of lenders. 'The shorter the term the more likely a cut.'

However, the crisis in the exchange rate mechanism has dampened consumer interest in fixed-rate products in the past week. London & Country mortgage brokers is advising borrowers to wait for a couple of weeks before going for a fix or to opt for a variable rate while fixed rates settle down. 'I would expect to see a whole new round of fixed rates - even if we have to wait until 1 September,' said Patrick Bunton, a mortgages adviser.

Borrowers tempted by discounted variable rates need to be on the look- out for redemption penalties on variable rate loans.

Last month Woolwich introduced a penalty of two months' interest, net of tax relief, for borrowers who opt for a discounted variable rate but cancel the arrangement within three years. First-time buyers, for example, can get a 3.5 per cent discount on the variable rate - currently 7.99 per cent - if they borrow more than pounds 60,000 but less than 75 per cent of the property value. But although the discount lasts for only one year, the penalty will be levied on all redemptions within three years of the completion date. While the borrower obviously sees the discount as a one-year deal, the society requires it to be held for three years before it can make a reasonable profit.

Halifax customers attracted by its one-year discounts will find a three- year early redemption clause carrying a penalty equivalent to two months' gross interest. Northern Rock has the same penalty system, and also bars customers from moving from a variable to a fixed-rate mortgage unless they move house.

Several other lenders have no such bars - Abbey National, Cheltenham & Gloucester and National & Provincial, for example. 'You can take out a fixed rate with us at any time,' an Abbey spokeswoman said. 'We're more than happy for people to do that.'

The heaviest cuts are likely to come at the shorter end of the market, the province of the first-time buyer. Five- year and longer fixes have become increasingly unpopular with lenders and borrowers alike in recent months. Ian Darby of the mortgage brokers John Charcol said: 'For five years the lenders can't play a marketing game. Because it's so long-term they can't cut their margins to get business in. But on two years they could do that.'

However, Alliance & Leicester could spark a rate war. It is offering 90 per cent advances on one-, two-, three- and even five-year fixes, each significantly undercutting most of the competition. The one-year is set at 5.45 per cent, the three-year at 6.95 per cent and the five-year at 7.95 per cent.

Seven out of 10 homebuyers have to buy insurance from their mortgage lender, according to Which? magazine. Nearly half are required to take out buildings insurance, a quarter contents insurance and one in ten redundancy insurance. 'You may get a discount on the mortgage,' the Which? report concludes, 'but the extra cost of the insurance may outweigh the savings.' It says redundancy insurance premiums are soaring, and the policies are usually 'riddled with exclusions'.

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