What rate cuts mean for you
The mortgage market was shaken up this week, but what does it mean for consumers?
Saturday 08 November 2008
The Bank of England cut interest rates to their lowest level in more than 50 years this week – in a bid to stop Britain slipping into a deep and lengthy recession. For anyone lucky enough to have a tracker mortgage, this was great news – as their monthly mortgage payments will now drop by tens or even hundreds of pounds next month.
But what about the rest of us? By yesterday morning, the best deals on the market were still way above the new 3 per cent bank rate. And for families with little or no equity in their homes, it's still almost impossible to remortgage.
Here, we look at the current state of the mortgage market for all the different types of borrowers.
I've got a tracker/ discount mortgage
If you're one of the lucky people to have a tracker mortgage, you should see your monthly repayments drop substantially next month. For example, if you have a £200,000 loan with 20 years left to run, your payments should fall by as much as £180 – depending on how much more you were paying above the Bank of England interest rate.
People with discount mortgages should benefit as well. Discount deals are pegged to a bank's standard variable rate (SVR), and many of the major lenders have begun to cut their SVRs over the last two days. Others are likely to follow next week.
However, David Hollingworth of London & Country mortgages, the fee-free broker, says that while it may be tempting to pocket any saving you make if you have a tracker or discount deal, it makes sense to consider using some or all of this money to pay down your loan quicker.
With house prices continuing to fall, the amount of equity in people's properties is being eroded. According to the Nationwide Building Society, house prices have fallen by almost 15 per cent over the past year, which means that if you bought your home for £200,000 last autumn, it may now only be worth around £170,000 now.
If you'd put down a 25 per cent deposit of £50,000, you would have started off with 25 per cent equity in your home but will now have less than 15 per cent. This may then become a problem once you come to the end of your current deal and have to remortgage, as few lenders at the moment are willing to lend more than 85 per cent of a property's value.
By making overpayments on your mortgage, Hollingworth says that families are more likely to be able to get a mortgage next time around.
I'm on a fixed-rate deal
If you've got a fixed-rate deal, then you won't see any benefits from this week's rate cut. However, the chances are that you'll have to think about remortgaging within the next couple of years, and, with a bit of luck, mortgage rates should be even lower than they are now by the time you start to shop around.
Even if your current deal is about to end, it's probably worth hanging on a few weeks to see what deals emerge now that the Bank of England rate has come down. Significantly, Libor – the rate at which banks lend to each other, which is much more important when it comes to pricing mortgages – also fell significantly yesterday, increasing the likelihood that the banks will bring out some much cheaper deals over the coming days.
Melanie Bien, director of independent mortgage broker Savills Private Finance, says: "The significant fall in three-month Libor is more important in terms of new borrowing rates than the drop in base rate. Lenders have pulled their trackers and have been waiting to see what happens with inter-bank funding – they will now be under huge pressure to pass most of it on."
Again, you need to be mindful of how much equity you have in your property. It's now all but impossible to get a mortgage if you have less than 5 per cent equity in your property, so keep an eye on property prices in your area, and if you think you're in danger of hitting negative equity, try and make some overpayments to your mortgage to keep yourself in the black.
I'm buying a house
If you're buying a property, and are looking for a new mortgage, there's not much on offer at the moment. This week, almost every lender withdrew all of their new tracker mortgages, as they waited to see what the Bank of England did with interest rates. Meanwhile, there are very few discount rates available either.
If you're looking for a good deal, the best thing to do is to wait a few days. Lenders are expected to begin reissuing tracker products next week, although it's not clear how far they'll be priced above the bank rate. Trackers are still the best option if you can get them, as almost all economists are predicting that the next rate in interest rates will be down – maybe even as soon as next month. The most pessimistic economists are predicting that rates may go down to 0 per cent.
If you do opt for a tracker, however, watch out for whether your deal has a "collar" – a rate below which your mortgage cannot fall. Nationwide and Skipton Building Societies are amongst a handful of lenders who already have collars on all of their tracker mortgages. In the case of Skipton, its collar is 3 per cent, which means that now the base rate has hit 3 per cent, its customers will see no further benefit if the bank rate is reduced further.
David Black, the head of banking at consultants Defaqto, believes that once banks begin to reissue trackers next week, collars will become even more prevalent. "When the new ranges of trackers get launched, you can expect far more to have a collar," says Black. "I expect you're also going to see bigger margins [between the mortgage rate and bank rate] as well."
At the moment, one of the only trackers on the market is being offered by HSBC, at 0.99 per cent above the Bank of England rate. However, you'll need a deposit of 40 per cent to qualify. If you've got less than that, Earl Shilton Building Society has a product which charges bank rate plus 1.75 percentage points – and you only need a 20 per cent deposit to qualify.
If you can't wait to get a new mortgage – or you want the stability of knowing what your payments will be each month – then there are still plenty of fixed-rate products on offer. But these look particularly poor value in the face of expected future rate cuts.
Woolwich, for example, has a two-year fixed-rate deal at 4.99 per cent, which is almost 2 percentage points above the bank rate. Hang on for a few weeks and there should be some much more competitive fixed-rate products.
No one will give me a mortgage
If you've got less than 10 per cent equity in your home, then it's now very hard to find anyone to lend to you. Nationwide recently stopped lending to anyone with less than 15 per cent equity, aside from existing customers, and many other lenders have pulled back from high loan-to-value (LTV) deals as well.
If you can't find anyone to give you a new deal when you remortgage, you'll find yourself paying your lender's SVR. This is usually much higher than the Bank of England rate and can mean a sharp hike in the size of your monthly repayments.
However, several of the largest banks reduced their SVRs by the full 1.5 percentage points yesterday – and many more are expected to follow suit next week – which means that switching to SVR may now not be nearly as painful as it once was.
In fact, for many borrowers, the SVR may actually be less than the rate they are currently paying. For example, as of 1 December, Lloyds and Cheltenham & Gloucester will have an SVR of just 5 per cent.
The downside of being on a bank's SVR, however, is that your mortgage rate is controlled by your lender and can move whenever the bank wants it to. Hence, if there are future bank rate cuts, there's no guarantee your rate will fall, although it's fairly likely that you'll pay more if the bank rate rises.
At the moment, less than 5 per cent of the country is paying the SVR, but Hollingworth believes this is likely to increase as more and more people find themselves with little or no equity in their homes.
With SVRs at much lower levels, it may make sense for people to avoid remortgaging, even if they have equity in their home. Remortgaging costs money – legal fees, valuation fees, and hefty arrangement fees. If you can stay with your current lender, you can avoid all that. If you are thinking of remortgaging, take the fees into account when calculating whether your new deal works out any cheaper over two or three years.
The lowdown: Where to find the cheapest SVRs
Chancellor Alistair Darling met bank bosses yesterday morning, to pressurise them in to cutting their standard variable rates (SVRs) by the full 1.5 percentage points which the Bank of England rate fell on Thursday.
The meeting proved to be pretty effective, with Royal Bank of Scotland, HBOS and Nationwide joining Lloyds and Abbey, who had announced full cuts on Thursday evening.
Nationwide's SVR is now just 4.69 per cent – this is cheaper than any new mortgages currently available on the market. While Lloyds and HBOS are not much less competitive at 5 per cent.
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