Home loan rivalry stirs up bargains

THE depressed state of the housing market is bad news for home owners, but worse still for estate agents, mortgage lenders and the solicitors and surveyors whose services are needed to complete a property sale.

Turnover in the mortgage market is still barely 60 per cent of what it was in 1988, the average value of properties is still lower than it was seven years ago, lenders and borrowers are much more cautious.

The resulting shrinkage in the demand for new mortgages has resulted in a galaxy of competing mortgage products and a mortgage war into which all the main lenders have been drawn. Standard mortgage rates vary only slightly, between 8.24 per cent and 8.5 per cent, but all lenders have an array of special offers.

The main weapons are a choice of fixed-rate mortgages for one, two, three or up to five years, that are designed to give borrowers peace of mind, and a range of cut-price deals offering discounts of up to 6 per cent on the current variable mortgage rates for up to a year, or smaller discounts for periods of up to three years. The latter are often backed by cashbacks, and rebates on surveyors'and legal fees.

Roughly 40 per cent of all new mortgages and 50 per cent of remortgages are now fixed-rate. Fixed-rate mortgages were originally designed to appeal both to first-time buyers and to home owners after the cost of the standard variable-rate mortgage doubled between 1988 and 1990.

When variable rates fell, some of those fixed rates began to look expensive, but a new range of offers has come in. Many lenders are offering fixed rates for one, two and even three years, at rates lower than they are currently charging for variable-rate deals. If, as conventional wisdom suggests, interest rates have to go up again as part of the continuing fight to control inflation, variable-rate mortgages will rise again and make the current generation of fixed rates look increasingly attractive.

But if current fixed-rate offers look quite attractive, barring a sudden and sharp recession with falling inflation, the current spate of discount mortgages, with or without cashbacks and fee rebates, looks a positive steal. Almost half the new mortgages recently granted and a quarter of the remortgages have been discount loans. They are in demand among nervous first-time buyers. They also appeal to seasoned home owners who have no plan to move but are attracted by the idea of a bargain package designed to cut the cost of mortgage repayments by 50 per cent or more for 12 months, even after paying the costs of the switch to a new lender.

Some lenders are offering discounts of up to 6 per cent on standard variable rates for six months, nine months or a year, or until fixed dates in the future.

Rivals have responded with discounts for 18 months, two years and even three years, although the size of the discount shrinks the longer it is available. Discounts of 3 per cent for two years and 1.5 per cent for three years are currently on offer.

A third variation to fixed rates and discount rates is the so-called capped mortgage, which guarantees a maximum rate, currently around 9.99 per cent for the next three to five years, although such mortgages generally specify a collar that prevents them falling all the way if standard rates fall sharply.

There is, of course, a downside. All lenders offering fixed-rate or discount mortgages specify a penalty to discourage borrowers who accept the offer and then seek to get out early if a better one comes along. Most lenders specify that borrowers will be penalised if they redeem the mortgage in less than two years after the incentive has lapsed and the rates have reverted to the normal variable rate. Similar penalties increasingly apply to fixed-rate offers.

In most cases, the penalty is equal to all the interest saved by the special deal; in some there is a tapered penalty and a lump-sum charge as well. If the mortgage market fails to pick up this summer, the offers may become even more generous. But anyone who waits until after October will lose the entitlement to mortgage interest support if they become unemployed and will be forced to wait nine months before getting any help at all.