Take an interest in the rates

Fixed or variable? Think hard, and don't forget to read the small print
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The Independent Online
Most mortgages in the past were straightforward, with variable rates that went up and down each time a building society or bank changed its rates. Today, the variable rate is either 7.24 per cent or 7.25 per cent with most high-street lenders, and even less with some of those who provide mortgages over the telephone.

But there are now a number of different interest rates available to borrowers, whether you are a first-time buyer, or someone moving house or seeking to re-mortgage an existing home loan. They are available with all the different means of repaying a mortgage.

The keener the interest rate, the smaller the percentage of the house valuation the lender will give. The best mortgage rates are normally available only to those who want to borrow less than 90 per cent of the valuation. (This figure is usually referred to as "percentage loan to value" in mortgage literature and tables). In some cases, the lender will also insist on arranging building and contents insurance.

Fixed-rate loans are in great demand at the moment. There are one or two lenders, including the NatWest Bank, which offer them for long-term loans, even up to 25 years, but the vast majority of fixed-rate loans are usually available for five or fewer years.

If you take out a fixed-rate loan, you can budget accurately for your mortgage payments, and at the end of the term you usually have the choice of taking out another fixed-rate mortgage or moving to a variable rate.

Offers of fixed-rate loans can be withdrawn very quickly from the market place, either because there is only a certain amount available or because money market rates have changed.

Recently, the Halifax Building Society offered a five-year loan fixed at 6.85 per cent and it sold out completely within a week. Some lenders are currently increasing the interest rate on their fixed-rate loans because medium-term interest rates are moving up in the money markets.

Another form of mortgage increasing in popularity is a "capped and collared" loan. Similar to fixed-rate loans in some respects, they can move between a maximum upper and a minimum lower interest rate over a number of years. If interest rates go down, they fall to the collar, rising to the cap if rates go up.

Not too many lenders offer them, but some of the five-year capped loans currently available include Bradford & Bingley, through selected brokers, with an upper rate of 7.99 per cent. Yorkshire Building Society has a maximum rate of 8.65 per cent and Abbey National's is 8.19 per cent. Very few have collars below 6 per cent.

While the housing market is returning to better times, competition for mortgages still remains keen. Many lenders continue to offer discounted mortgage rates, usually for a year or two. The days are gone when many building societies would offer a discount for five years.

With a discounted mortgage the borrower pays a reduced interest rate for a fixed period, after which the loan reverts to the variable rate. Offers currently available include 0.99 per cent off for six months from the Bank of Ireland and 1 per cent for a year from the Scarborough Building Society.

In addition to the lower interest rates, some banks and building societies are offering cash-backs of 3 or 4 per cent of the loan - up to pounds 400 in every pounds 10,000 borrowed - as well as free valuations and legal expenses.

But do remember, discounted and fixed loans have hefty penalties if they are redeemed early. Some are portable - so you can benefit from the same terms if you move house - but not all. So if you are offered a low-start or discount mortgage, it is even more essential than usual to read the small print n

Tony Lyons

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