Further cuts in fixed-rate home loans

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The Independent Online

Lenders desperate to grab a slice of a shrinking market for home loans are dropping rates on their long-term fixed rate mortgages by up to 2 per cent.

The fall in the cost of long-term mortgage rates in the past three months has been far greater than the headline-grabbing drop of about 0.4 per cent last month.

Both would-be and existing borrowers on variable rate mortgages were then offered cuts averaging pounds 13 a month on an average pounds 50,000 loan.

The decision to slash rates fixed over three and five years by about 0.75 per cent has meant savings of twice that amount for new borrowers entering the market. In some cases the savings have been even higher.

Olive Thompson, mortgage editor at MoneyFacts, the monthly investment and mortgage guide said: "What we are finding is that there is increased competition, particularly among some of the larger lenders who are now appearing in our best-buy charts.

"All fixed rates have gone down compared to what they were a few months ago."

MoneyFacts tables show that Britannia Building Society recently reduced the cost of a five-year fixed interest loan from an admittedly high 9.34 per cent to a market-beating 7.24 per cent. The 2.1 per cent drop means a cut of pounds 100 in the monthly cost of a pounds 50,000 mortgage.

Nationwide has cut its two-year fixed loan from an uncompetitive 7.19 per cent in June to 5.49 per cent. Woolwich's two-year fixed mortgage now costs 4.99 per cent compared with a rate of 6.49 per cent in June.

Ian Darby, a director at John Charcol, the UK's largest mortgage broker, said yesterday: "Most building societies are not hedging short fixes on the money markets.

"They are linking them directly to the cuts in the standard variable rate. In practice, whatever the variable reduction, the fixed rate drops also."

Mr Darby singled out Portman, Bradford & Bingley and Skipton building societies as those with the deepest fixed rate cuts.

Over longer periods, lenders are benefiting from the money markets' backing of the Chancellor, Kenneth Clarke, in his battle against base rate rises with Eddie George, Governor of the Bank of England.

But competition is forcing them to cut prices even further. Nick Deutsch, chief executive at First Mortgage Securities, one of the UK's top centralised lenders, said: "There's no point in beating about the bush.

"If we offer a 4.75 per cent mortgage fixed for two years, we are losing money in the process. But the customers want it and the hope is that we can keep them for a longer period after the fixed period ends so that we can start to make money then."

Mr Deutsch said competition was forcing lenders to cut the cost of loans and slash their margins despite the absence, so far, of a corresponding downward move in base rates.

In some cases, mortgage rate reductions are used to cement building societies borrowers' loyalty. Yorkshire Building Society, has reduced its variable rate to 7.85 per cent for existing borrowers.

Mr Darby said that other reductions were being offered by societies which hoped to grab a greater share of the loan market in advance of their abandonment of mutual status.