Mayhem for mortgages

As loan costs soar, Clare Francis looks at how to get a better deal
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The Independent Online

Some owners will be breathing a sigh of relief following the Bank of England's decision on Thursday not to raise interest rates again this month.

Yet the rate rises of the past six months, coupled with the abolition of mortgage interest tax relief at source (Miras) and the married couple's allowance (MCA), mean thousands are struggling with their repayments.

The end of Miras will cost home owners with a £50,000 mortgage an extra £19 a month - the equivalent of a quarter of a per cent rise in interest rates. The full effects of the abolition of MCA are not yet known, but it is expected to leave couples £400 worse-off per year. This, along with the end of Miras, could cost home owners an extra £50 a month.

"We have seen a spate of rate rises since the autumn and now have to wait for them to take effect," says Philippa Drew, marketing director of the Kensington Mortgage Company. "One of the difficulties is that the whole country is affected in the same way, despite the fact that the high prices in the South-east are not reflected everywhere. Those in the North are being hit hardest."

These problems could be exacerbated if the Bank decides to raise rates again in the coming months. Faced with this prospect, it could be worth remortgaging your property.

"We don't think another rise in rates is off the agenda," says Siobhan Hotten of independent mortgage broker John Charcol. "It is a question of when rather than if. Rates may start to come down next year. As a result, we are seeing people hedging towards two- or three-year mortgages without redemption penalties, either fixed or at a discount, rather than going for a five- or six-year commitment."

According to moneysupermarket.com, mortgage applications over the past two months have been split between 56 per cent opting for a discount mortgage, 28 per cent a fixed rate, 11 per cent a flexible loan and 5 per cent applying for other types. The bulk of applications are from people remortgaging to find a better deal than the standard variable rate.

Those mortgages without redemption penalties provide home owners with more flexibility. If you opt for a discounted rate, you can switch to a fixed rate if you think rates will carry on rising. The Nationwide has a two-year discount of 1.69 per cent off the standard variable rate of 7.3 per cent, giving an effective rate of 5.6 per cent. There is no redemption penalty but there is a £350 fee.

First-time buyers can take out a 97 per cent mortgage at the Halifax and enjoy a 2 per cent discount from its standard variable rate of 7.7 per cent. This lasts until the end of September 2001; there is no fee or redemption penalty. The Melton Mowbray is offering a discount of 1.74 per cent for three years.

Looking for a fixed rate without redemption penalties is important because if rates drop again, borrowers may well find themselves paying more than they need.

The Leeds and Holbeck offers a fixed rate of 5.95 per cent until 1 June 2002 without any redemption penalties, although there is a £300 arrangement fee. The Loughborough has a rate of 5.75 per cent, fixed for two years. There is a 5 per cent redemption charge and an arrangement fee of £300.

Standard Life Bank has a mortgage with a 50:50 split between fixed and variable rates, giving you the security of knowing how much you pay but enabling you to benefit from any interest rate reductions.

Contacts: Halifax, 0800 203049; John Charcol, 0800 718191; Kensington Mortgage Company, 0808-100 4200; Leeds & Holbeck, 0800-072 5726; Loughborough, 01509 610707; Melton Mowbray, 01664 480214; Moneysupermarket, www.moneysupermarket.com; Nationwide, 0800 302010; Standard Life, 0845-845 8451.

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