Since December 1994 the cheapest discounted variable-rate mortgages have remained virtually unchanged at about 5 per cent for a two-year discount. And while the cheapest fixed- rate mortgages have been reduced by just over 1 point over the same period to 4.75 per cent for a two-year fix, lenders are now digging their heels in. Some, such as Bank of Ireland, have decided not to follow the Abbey below 8 per cent. The reality is that lenders are not prepared to further sacrifice a slice of their 2 per cent profit margins.
Or, put another way, this is as cheap as it gets. Unless, of course, the Chancellor can be persuaded to do something in the November Budget.
Few economists believe the Government can or should reverse its policy of gradually withdrawing home ownership subsidies. Indeed, Kenneth Clarke, the Chancellor, has already stated publicly that he is not convinced by the arguments for increasing again the tax relief on mortgage interest or for special help for first-time buyers. However, he is being lobbied hard by both lenders and influential Conservative Party strategists to abolish the stamp duty on house purchases.
Stamp duty - which is payable on property worth more than pounds 60,000 at a rate of 1 per cent of the total value of the property - earns the Treasury just pounds 500m to pounds 600m a year, so it would be an easy target if Mr Clarke wanted to abolish a tax at a stroke.
More importantly, the abolition of stamp duty would significantly reduce the cost of moving home without involving a reversal of the Government's policy of reducing subsidies on the ongoing cost of home ownership.
"The reason there is a log jam in the housing market is because the transaction costs are so high,'' said James Barty, chief UK economist at Morgan Grenfell. "People either have negative or insufficient equity and cannot afford the deposit to move.'' The problem has led to a dearth of good properties on the market as homeowners stay put. This has further depressed housing turnover by putting off those who are willing to move, but only if they can find the right home. "Lower the transaction costs and you might get the market moving again,'' Mr Barty said.
Just what effect the abolition of stamp duty will have on the market is difficult to gauge. When Norman Lamont temporarily suspended stamp duty between December 1991 and August 1992 there was a big increase in activity. But it is not clear whether this was the result of a bunching of transactions towards the end of the window of opportunity. Lenders also reported an increase in underlying activity,although this may have been influenced by new fixed-rate products at the time. Still, most economists agree that abolition of stamp duty would be a sensible way to inject some life into the market.
"It is a perfectly plausible option for the Chancellor,'' said Chris Giles of the Institute of Fiscal Studies. "It would very likely lead to a one-off increase in property prices, with homeowners quickly adjusting the price of their home. That would help homeowners with insufficient or negative equity.''
The abolition of stamp duty would provide a politically acceptable short- term fix, especially since the Chancellor now has less room for income tax cuts. But lenders are keen to see the cost of house transactions permanently reduced, perhaps by replacing Mortgage Interest Relief at Source (Miras) with a once-in-a-lifetime grant.''
"Miras is withering on the vine,'' Mr Barty said. "What we are saying is, let's do something better with it. Instead of subsidising mortgage payments to the tune of pounds 3bn a year, the money could be used to give homebuyers a one-off lump sum, say of pounds 3,000, when they moved home for the first time.''
The consensus now is that the housing market will start to show signs of a real recovery next spring. House prices are at their most affordable for 30 years and there is greater optimism over the two key issues - real growth in personal income and interest-rate security. But the abolition of stamp duty in the Budget is still a reasonable bet. As Mr Giles put it: "You would be daft to do anything before [the Budget]."
And it's goodbye to the safety net
If you take out a mortgage after next weekend you will get no help from the state if you lose your job or fall ill. Cuts in the social security budget mean that you will only qualify for mortgage interest benefit after nine months. New borrowers, especially the self-employed and contract workers, are strongly advised to take out mortgage protection.
Most lenders now offer standard protection policies, But the price, the level of cover and policy conditions vary considerably so it is essential to ensure you buy what you need.
The price obviously depends on the cover required. But Halifax building society and Barclays Bank this week set the new benchmark with deals priced at pounds 4.98 and pounds 4.50 per pounds 100 of mortgage interest cover respectively, payable for 12 months. Both offer cover for the self-employed and contract workers subject to certain conditions. The Halifax plan also comes with a repayment holiday option.
However, the policies are not designed to fully replace state cover, so check carefully before you buy.Reuse content