Mortgages that are safe as houses

'Our most important possession still seems uniquely vulnerable to fluctuations in interest rates'
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The Independent Online

Nationwide, the UK's biggest building society, stepped up the mortgage price war on Wednesday when it cut its standard variable rate by 0.2 per cent to 7.09 per cent.

Nationwide, the UK's biggest building society, stepped up the mortgage price war on Wednesday when it cut its standard variable rate by 0.2 per cent to 7.09 per cent.

Does this mean Nationwide has correctly forecast the next decision by the Bank of England's monetary policy committee, and that the next movement in interest rates will be downwards?

This is an important question for anyone deciding which mortgage to choose. There are many influential voices arguing that rates still need to move upwards, because of such factors as wage inflation and a recovery in London house prices.

One of the easiest ways to make yourself look foolish is by being too confident in predicting what is going to happen to interest rates. Nationwide's move says far more about the cut-throat competition between mortgage lenders than about the direction in UK interest rates. This particular rate cut is good news for Nationwide mortgage customers, but not so good news for savers - whose rates were also lowered by the Nationwide.

Introductory rates being offered by mortgage lenders nowadays are fairly eye-popping, with some deals charging as little as 4 per cent for the first year. The trouble with trying to compare mortgages is that, like many financial products, there are so many different features that hardly any two mortgages are the same.

I suggest you bear a number of principles in mind when seeking the best deal for you, and demand straight, simple answers from your chosen mortgage adviser.

The first thing I always worry about is lock-in charges - penalties for leaving your mortgage "early". I say this having been victim to a clause in an HMC mortgage in the late 1980s which kept me paying over the odds long after the initial "two-year reduced rate" period. As a rough rule-of-thumb, I think it's reasonable to accept lock-in penalties for a two-year period ie get a good rate for two years and then look around for a new deal.

Ideally of course it would be nice to get a mortgage with no lock-in penalties at all, one you could walk away from at any time. But as always, there is a trade-off. You will only get a better rate if you agree to some form of lock-in.

There is also a trade-off between the amount you borrow relative to the value of the property, and the rate you will be able to get. Most mortgage deals offer a much better rate at 75 per cent "loan-to-value" (LTV) than at 90 per cent. There will usually be a higher rate again for 95 per cent, while most lenders are reluctant to lend 100 per cent

The same goes for fixed rate and capped loans, now more popular than the traditional variable rate loans. Again, I think it is worth paying more to assure yourself of at least a couple of years' peace of mind, after which you can again look around for a new mortgage. You should bear in mind that most Americans take out home loans on fixed rates lasting 20-30 years, and it doesn't seem to do them any harm. Although more of us are taking out fixed or capped mortgages, our most important possession - the place where we live - still seems uniquely vulnerable to fluctuations in interest rates, bizarrely so in foreign eyes.

I am a fan of flexible mortgages, an invention of Australia rather than the US. With a flexible mortgage, you are allowed to pay off more or less each year depending on your circumstances. Again this will cost extra, but I think it's worth it.

John Willcock is personal finance editor of The Independent

j.willcock@independent.co.uk

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