Sun Alliance homes in on homebuyers

SUN ALLIANCE is aggressively entering the mortgage market with a package of variable and fixed rates that undercut nearly every other product available.

The variable rate is currently in effect pegged at 5.25 per cent - about 2.5 per cent below the leading building society rates. And the two-year fixed rate is pitched at a competitive 6.45 per cent.

Falling interest rates and the suspicion of an upturn in the property sector are encouraging new players like Sun Alliance to enter the market.

If property prices and interest rates stabilise insurance companies, centralised lenders and other users of wholesale funds could become more competitive than the building societies, which fund their lending from the currently more expensive retail market.

The 6.45 per cent rate is fixed until April 1995. Sun Alliance's present base variable rate is the lowest on the market. But, like many other lenders, it is offering a discount on that rate - to 5.25 per cent until February next year.

First Mortgage Securities and the lending wing of Allied Dunbar withdrew from mortgage lending last year. A spokesman for FMS said that if property prices stabilised in the second quarter of this year the company 'would expect to be in a position to start lending again'. Allied Dunbar, which had a mortgage lending book of pounds 1bn in 1988, believes 'the opportunities are there again'.

In contrast, Eagle Star insurers, which also pulled out of the lending market last year, has no plans to go back in.

Sun Alliance is lending on extremely competitive terms, although it is limiting its outlets to its network of tied agents and to a small number of other brokers.

Chase de Vere is one of those brokers. Simon Tyler, a mortgage specialist, said: 'If the price of wholesale money remains lower than the price of retail money the insurance companies have something to offer.

'They have the ability, in theory, to make loans at higher margins because they are also looking at attracting more life business. Where you could lose out with them is the variable rates.'

The Sun Alliance Mortgage Company is still in its pilot stage, with no plans to launch itself formally until March or April.

For remortages as well as straightforward mortgages the company offers an attractive deal. The valuation fee will be paid for by Sun Alliance, and if the borrowers use its solicitors they can get the legal work done free. 'We think the opportunity is there and the market is right,' John Walton, managing director of Sun Alliance Mortgage Company, said.

Royal Bank of Scotland is another lender shaking up the market in an attempt to transform itself from being a small to a large player. For a start it offers 100 per cent mortgages.

Unlike nearly everyone else in the market, it does not charge mortgage indemnity insurance. A 95 per cent loan on a pounds 100,000 property would typically incur a one-off pounds 1,500 mortgage indemnity insurance premium to insure the lender against the possible default of the borrower.

The bank says it has little need of the cover because it has few defaults. Its variable rates remain competitive, now pegged at 8.5 per cent and going down to 7.99 per cent at the start of next month.

In contrast, the lending wing of the insurer Norwich Union justifies its 9.5 per cent variable mortgage rate by saying that it operates in the riskier part of the market.

Norwich only does 'top-up' lending and has a secondary, not a primary, claim on the property if a borrower defaults.

Like Royal Bank, it makes 100 per cent loans. Because it cannot get mortgage indemnity cover on these it compensates by adding 1 per cent to its variable lending rate, bringing it to 10.5 per cent.

Within the next few months the building societies are probably going to find themselves hard pushed to remain competitive. The Household Mortgage Corporation's 40,000 borrowers are still paying a variable rate of 9.95 per cent. Tied to three- month wholesale market funds, HMC has long been a laggard as interest rates have fallen.

But now that wholesale funds have become cheaper than retail funds HMC can make some amends. Next month it cuts the variable rate to 8.45 per cent, and on 1 April the base variable rate goes down to 7.69 per cent

(Photograph omitted)