A saving with a nasty sting

Discounted deals are fine for the short term - until the standard variable rate kicks in, says Stephen Pritchard
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The Independent Online

When it comes to mortgages, it really does pay to read the small print. As the latest twice-yearly survey of mortgage rates from independent researchers Moneyfacts shows, a small difference between mortgage rates makes a big difference to a home owner's pockets.

When it comes to mortgages, it really does pay to read the small print. As the latest twice-yearly survey of mortgage rates from independent researchers Moneyfacts shows, a small difference between mortgage rates makes a big difference to a home owner's pockets.

Moneyfacts analysed the standard variable mortgage rates (SVRs) of the UK's 35 leading lenders. The results are quite staggering. The difference between the cheapest in the survey, HSBC, and the dearest, The Mortgage Business, comes to £1,173.50 a year on a loan of £100,000.

In fact, most of the country's largest lenders find themselves at the wrong end of the Moneyfacts table. Halifax and Abbey, the largest and second largest lenders, are both £1,052.46 a year more expensive than HSBC, based on rates in force in December last year. This ranks the two lenders at 21 out of 35 in the table.

Only one other large lender, Nationwide, makes it into Moneyfacts' top 10, which is dominated by mutual building societies as well as "direct" lenders Egg, Intelligent Finance, Standard Life Bank and Direct Line. Apart from HSBC, no clearing bank makes it into the top 20.

Moneyfacts mortgage researcher Samantha Owens says that although many borrowers take out short-term mortgage deals, most of these convert to standard variable rate mortgages at the end of the special rate period.

The Moneyfacts table points to long-term value. "Borrowers who do not want to repeatedly switch their deal would do well to look at the lenders who feature high in this survey," she says.

Not everyone, however, has the discipline to watch mortgage rates, and move from lender to lender and from one short-term deal to another. In that case, a mortgage with HSBC, Egg or Nationwide Building Society, the top three in the Moneyfacts survey, offers a good long-term option.

Buyers looking for a small mortgage might also want to look for a lender with a good long-term record for a low SVR. Moving from lender to lender means paying legal and survey fees as well as lenders' arrangement fees. Lenders' fees in particular are on the rise, and for borrowers with a small loan, paying fees every two or three years may well outweigh any savings on the basic interest rate.

Lenders' standard variable rates, though, are invariably the most expensive mortgages on offer. According to Ray Boulger, senior technical manager at mortgage brokers Charcol, fixed, discounted, tracker and capped rates are all likely to offer better value. Buyers are almost certain to find a more attractive deal if they shop around.

Tracker mortgages are an increasingly popular option for buyers who do not want to tie into a fixed rate mortgage. Tracker loans are priced by setting the mortgage rate at a fixed margin above - or in the case of a discount tracker below the Bank of England's base rate.

This takes some of the uncertainty out of borrowing on a variable rate mortgage. Although a tracker cannot offer the security of a fixed rate, home buyers are not exposed to the vagaries of their lender's interest rate policies.

Some lenders frequently increase their standard variable rates by more than increases in the Bank of England's base rate - or fail to cut them as far when rates are on the way down. A tracker protects against this.

"If buyers want to go for a good long-term rate, they should look for a mortgage based on a lifetime tracker," says Boulger. Charcol is offering a life-time tracker priced at 0.41 per cent over the Bank of England's base rate.

Taking out a discount or tracker mortgage, however, does not always guarantee that a home buyer can avoid paying a standard variable rate. Although several lenders offer lifetime tracker loans, they might also offer loans that are trackers for a few years, then move to the SVR. This is especially the case for mortgages that offer an initial discount.

Halifax and Abbey offer discounted mortgages that start as trackers but revert to the (more expensive) SVR at the end of the discount period; most Woolwich loans are discounts based on the SVR, rather than the Bank of England's base rate; Cheltenham & Gloucestershire has some mortgages based on the Bank's rates and some on its SVR.

Borrowers might also have to pay the SVR if they are unable to switch lenders for any reason, or because they take out an offset mortgage, where the loan is linked to savings or a current account. Some of these are tracker loans, but some are based on the SVR. So even buyers with every intention of shopping around should pay attention to the Moneyfacts table.

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