Price war opens mortgage front

WHILE a million home owners are stuck with negative equity, the housing market shows little signs of making a recovery, which is bad news for banks and building societies.

But for new borrowers, those who can move, and remortgage applicants, the choice of home loan plans and incentives has never been greater.

Last year there were around 1.1 million house moves, down from a peak of 2 million in the boom year of 1988, and most commentators think the number of transactions is not set to pick up significantly for the rest of the decade.

The Council of Mortgage Lenders spokeswoman, Sue Anderson, said: "We have revised our forecast for this year downwards and expect to see a similar number of transactions as before. Hopefully, with increasing confidence, we can look forward to more activity in 1996."

But while the lenders look glum, there has never been a better opportunity for borrowers to get benefits wrapped around their mortgages.

Abbey National, for example, is offering a Mortgage Bonus with every loan, having eschewed the cash-back route, which could present problems with capital gains tax for a borrower who has used up the £5,800 limit.

Abbey provides the borrower with up to £320 towards the cost of a valuation and up to £300 for legal fees. Existing Abbey National borrowers get an extra £200 towards their legal fees. Halifax is offering a £200 cash incentive and free valuation for re-mortgage customers.

Private Label Mortgage Services designs loan products for around 12 UK residential mortgage lenders. Its executive chairman, Stephen Knight, said: "The market is oversupplied at the moment, but there is bound to be attrition sooner or later, and I believe in mid-1996 we will begin to see this product frenzy start to fizzle out."

But banks and building societies show no sign yet of calming down their mortgage product activity. Discounts or special low rates for first-time buyers, remortgage business stolen from rival lenders, and cash-backs, are two a penny.

However, borrowers should remember that you are usually locked into a discount mortgage for two years after the discount ends, and must repay the discount if you pay off the loan or want to remortgage again in the penalty period.

Some lenders also expect remortgages to be phased over at least five years, although there is nothing to prevent borrowers redeeming loans once the discount lock-in has ended.

Royal Bank of Scotland has been fighting to gain mortgage market share for the past 18 months.

Before Christmas the bank launched its Christmas Cashback, which offered to reduce the outstanding mortgage balance by one month's repayment each year.

It was launched as the lifetime discount, offering 0.5 per cent off the bank's standard variable mortgage rate (currently 8.44 per cent) for the life of the mortgage, up to 25 years.

Dave Appleton, Royal Bank spokesman, said: "Unlike other deals this is guaranteed for the whole life of the mortgage."

The understanding between composite insurers and mortgage lenders, which meant borrowers had to pay up-front fees for mortgage indemnity premiums, is also now being challenged.

Mortgage indemnity is the insurance a borrower pays when loans are arranged over 75 per cent of a property's value, to back the lender in the event the borrower defaults.

Typically the fee is charged on a 25-year basis, but the majority of home loans are taken out for seven or eight years.

Now Woolwich is offering a monthly premium on its telephone mortgage service, Woolwich Direct. The project is backed by GE Capital - insurance and finance arm of the US giant General Electric.