The demolition of depression

As lenders scramble to kickstart the market, now is the time to drive a good deal. Here and on pages 16 to 17 we examine the options for borrowers
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The Independent Online
The housing market is set for lift-off and estate agents are more confident now than at any time in the past 18 months - so claims Britain's 10th biggest building society.

Homeowners have heard it all before, of course, but the Birmingham Midshires building society, which commissioned the survey of estate agents, is right to suggest that now is the time to get your mortgage in order. Lenders are so desperate to kickstart the housing market that they are offering highly competitive fixed-rate and discounted mortgages to tempt new borrowers. Most of these loans are available for remortgages as well, so even if you do not want to move house, it is worth taking a look.

Patrick Bunton, of the Bath-based independent adviser London & Country Mortgages, says: "It's unlikely that interest rates will go much lower, so borrowers should consider locking in to fixed-rate loans now to protect themselves against a possible rise in the future."

Indeed, the most attractive fixed-rate deals, which reflect expectations for interest rates over the next few years, have already been withdrawn and replaced by more expensive offers.

Political concerns will also play a part in borrowers' decisions. The general election is a year away at most and it seems increasingly likely that Labour will form the next government. Labour is associated with inflation, which could help millions of homeowners struggle out of negative equity. But Labour is also connected with higher interest rates, which will hit homeowners' pockets if they fail to take action now.

With such prospects in mind, Mr Bunton favours fixed-rate loans. These guarantee that the borrower will pay the same monthly payment throughout the fixed term. Lenders offer a huge variety of terms - from 12 months to 25 years. Once the fixed period ends, the interest on the loan becomes variable, moving up and down in line with the UK base rate. The shorter the fixed term, the lower the interest rate is likely to be, as our table of best borrowing rates on page 19 underlines.

But Mr Bunton thinks borrowers will be better off with loans fixed for five or six years. Although these do not offer such temptingly low rates, they will ensure that borrowers can afford to pay their mortgage over the term of the next government, regardless of which party is in power.

Borrowers who are prepared to put up with fluctuating mortgages may prefer a discounted- rate loan. As its name suggests, this type of deal charges a lower rate of interest than the prevailing standard variable rate. Discounts typically run from one to three years, and can cut the cost of a mortgage right down to 1 per cent.

However, both types of loan have drawbacks. If borrowers decide to pay off the loan within a pre-determined period, they will face large early redemption penalties, often amounting to several months' interest or a fixed percentage of the loan. The penalty period usually extends beyond the fixed or discounted term.

This means the borrower is forced either to stump up the penalties or pay whatever variable rate the lender demands at that time.

On top of this, borrowers who apply for a fixed-rate mortgage will have to pay a non-returnable fee upfront of pounds 250 or more.

John Charcol, the London- based mortgage adviser, has tried to solve the problems facing discount borrowers by offering a mortgage on a "rolling discount" basis, which initially allows borrowers to pay 1.2 per cent less interest than standard borrowers for five years. This provides a current variable rate of 5.79 per cent. At the end of that term, they can switch to a new discount rate offered by the lender for a fee of 0.5 per cent.

The loan also has limited penalties for early redemption: three months' interest in the first three years and nothing thereafter. John Charcol has designed the loan for people with a deposit equivalent to 25 per cent of the property's value, ensuring that borrowers will not have to pay for an expensive mortgage indemnity guarantee.

Even if you are paying a fixed or discounted rate now, it may be worth remortgaging to one with a cheaper or longer fixed period. Whether or not it is the right course of action depends on the following calculation and comparison.

Add up all the costs of transferring your loan to another lender, including solicitor's fees, surveyor's fees, application charges, any redemption penalties on your current mortgage, and mortgage indemnity insurance. Then add this to the cost of what your new monthly mortgage payments would be during the fixed or discounted period if you switched the loan. Compare the resulting figure to the cost of keeping your current mortgage over the same period.

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