Money Insider: Rate cuts open up loans market

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The Independent Online

There are more signs that competition in the mortgage market is growing. Following rate reductions last week from Abbey, Woolwich and Northern Rock, First Direct has now launched two new keenly priced base-rate tracker mortgages.

For someone looking to borrow up to 60 per cent loan to value (LTV) – in other words, those who have a 40 per cent deposit – the rate is 2.99 per cent (base plus 2.49 per cent). If your deposit is a bit smaller, there is a 75 per cent LTV option at 3.44 per cent (base plus 2.94 per cent).

The beauty of these products is that there are no fees. That means no product fee, no arrangement fee, no exit fee, no early repayment penalty and no standard valuation fee. There is also the option to offset this product and the flexibility to make unlimited overpayments.

This is a smart move from First Direct as it is often the thought of having to pay a four-figure fee that puts people off switching. Customers currently sitting on their lender's standard variable rate as they ponder whether to switch to a new variable or fixed-rate product could well be tempted by this limited offer.

New options for existing Nationwide customers

Nationwide has improved the mortgage options for customers coming to the end of an existing deal. A two-year fixed-rate mortgage with no fee has been cut by 0.19 per cent to 3.99 per cent and is available to 95 per cent LTV customers. Alternatively, there's a two-year fix at 3.79 per cent with a £495 fee. For a slightly longer fix, Nationwide is offering 4.64 per cent with no fee or 4.49 per cent with a £495 fee (both for three years and available to 95 per cent LTV customers).

While the rate reductions are welcome, they may not be sufficient to tempt people to switch from the standard variable rate. Anyone who took out a mortgage with Nationwide before 29 April 2009 will revert to an extremely low SVR of just 2.5 per cent.

With the Centre for Economics and Business Research this week forecasting that the cost of borrowing will remain at its record low of 0.5 per cent until 2011 and remain below 2 per cent until 2014, it is likely that the majority of customers will remain on the SVR for the foreseeable future.

For example, a borrower with a balance of £120,000 and 20 years still to run on their mortgage would pay £636 per month at 2.5 per cent SVR, compared with £768 on the three-year fix at 4.64 per cent.

Low inflation is good for savers

The latest set of inflation data issued this week revealed that the consumer price index (CPI) had slipped to just 1.1 per cent. While this is good news for consumers on the high street, it's also a welcome boost for savers too. Even though savings rates are well down on the highs of last summer, this very low rate of inflation makes it much easier for consumers to obtain a real return on their money.

A 1.1 per cent, CPI figure means that a gross savings rate of 1.375 per cent will preserve the spending power of a nest egg for basic-rate taxpayers, while high-rate taxpayers need to secure a rate of 1.84 per cent gross or higher.

Although there are still many savings accounts paying a paltry sub 1 per cent interest rate, there are a growing number of better deals to be had, too. If you're looking for instant access to your savings you can get 3.3 per cent AER with the flexible saver from Citi or 3.2 per cent AER from ING Direct Savings. Just bear in mind that both of these rates include a sizeable bonus element for the first year, so you may have to review your options in 12 months' time.

If you're happy to put your cash away for a fixed term, then the rates outstrip CPI by an even bigger margin. For a one-year fixed-rate bond, you can get 3.7 per cent AER with the Post Office or Bank of Cyprus UK, for two years the AA will reward you with 4.35 per cent AER and if you're happy to leave your funds untouched for the longer term, you can earn 5.3 per cent AER from Yorkshire Building Society.

yourmoney@independent.co.uk

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