Interest rates lose their edge as owners go for fixed deals

There's been no change in the cost of borrowing, writes Sam Dunn, but savers have tax and pension issues to grapple with after the publication of the Finance Bill
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The Independent Online

The relief from UK homeowners at the decision to leave interest rates on hold at 4 per cent was almost palpable.

The Bank of England's Monetary Policy Committee (MPC) announcement that rates would not rise also came as a great surprise to many in the housing market, who believed that the rate would edge up by at least 0.25 per cent to dampen vigorous house price inflation.

Yet the conundrum for homeowners and buyers seeking the best value remains; should you stick with a discounted variable rate or tracker mortgage, or plump for a higher fixed-rate deal in anticipation of increased borrowing costs in the future?

After last week's rate-rise no-show, most housing market analysts predicted that interest rates would almost certainly have to go up next month.

For now, Ray Boulger, a senior technical manager at mortgage broker Charcol, suggests you should stick with discount or tracker mortgages. "Unless the Bank of England base rate increases to over 5 per cent, the best value is still to be found in these deals," he says.

"However, some borrowers will consider it is worth paying the higher initial price of a fixed or capped rate for the security and peace of mind they offer, despite some of the best fixed rates having been repriced upwards this week."

Ben Thompson, a director of the Clear Cut mortgage broker, plays down the significance of the base rate.

Thanks to awareness campaigns by consumer groups, brokers and the Treasury to convince people of the merits of switching to fixed-rate products to inject stability into their finances - and the housing market - he estimates that more than a third of homeowners won't be affected by any increase.

"It will be interesting to see just what impact an almost inevitable rate rise will have next month," he says. "Because of these campaigns, some 36 per cent of households are now not affected by interest rate decisions. This is a relatively new situation for the UK, and it is difficult to predict what the effect will be.

"At the same time, there will soon be swathes of households coming to the end of one- and two-year deals that were taken out when rates were low, and the market is a different place now."

He recommends moving to a fixed-rate deal if you have borrowed heavily to get on to the housing ladder. The focus on any rate rise has assumed particular importance in the light of hefty consumer debt.

According to figures from the Bank of England, our borrowing continued its record trend skywards in February. Mortgage lending grew at its strongest level for four months in February to nudge £25bn, while loans, overdrafts and credit card borrowing stood at £18bn.

Much industry concern has turned on the sheer amount we are borrowing, but the indications are that consumer confidence remains extraordinarily high. A survey from internet bank Egg last week highlighted how, despite fears of a downturn in UK house prices, consumers appeared to be "extremely confident" about their level of debt.

Its research revealed that some 92 per cent of homeowners felt "comfortable" with their home loan and only 7 per cent expressed any concern that they might be overstretching themselves.

If the uncertainty over debt remained, the savings puzzle did, at least, become a little clearer. The publication on Thursday morning of the Government's Finance Bill - a monstrous 575-page text that brought whimpers from accountants - yielded some details of how the Government plans to encourage us to save.

Many of the details had already been flagged up, including plans for tax-avoidance "registration schemes" that will target many loopholes within inheritance tax (IHT) planning.

IHT has become a problem for more Britons as the housing price boom has pushed property values well over the threshold for IHT liability, currently £263,000. Any part of your estate in excess of this sum is liable for IHT at 40 per cent.

Estimates suggest that the number of people paying IHT has soared by 55 per cent since 1998, and this has sparked greater interest in ways to reduce the value of estates.

The Finance Bill also aims to simplify the eight pensions tax regimes by pulling them into one system, although implementation will have to wait until April 2006.

However, one new rule was picked up by accountants PricewaterhouseCoopers: the introduction of extra income tax relief for employee shareholders.

Under the proposals, staff who put shares acquired via a Save As You Earn (Saye) option plan or Share Incentive Plan (SIP) into a pension scheme could claim income tax relief on the value of these shares.

This would come on top of tax relief already available for all contributions into a pension scheme.

"From 2006, employee shareholders will be able to claim income tax relief on shares contributed into a pension scheme, which could provide double tax relief," says Carol Dempsey, a reward and compensation partner at PricewaterhouseCoopers.

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