Your Money: Shifting rates need watching

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The Independent Online
INTEREST rates finally came down this week, and have already stayed down for nearly a whole week.

Mortgage rates are abandoning double numbers, and homeowners with mortgages are now contemplating a reduction in monthly payments from November, with around pounds 22 a month coming off a standard pounds 50,000 repayment mortgage and pounds 26.50 off the same endowment mortgage.

Someone with a pounds 70,000 mortgage will see the same reduction, as the larger-loans discounts are being trimmed back.

Borrowers have always been able to look at the monthly repayments to judge a mortgage offer as well as the quoted rate. There is also usually an APR, annual percentage rate, buried somewhere in the literature. This is supposed to make it easy to compare rates, but sometimes just adds to the confusion.

Take the 9.99 per cent mortgage on offer from the Midland and NatWest banks, which somehow translates to an APR of 10.6. Then try to compare it with the fixed rate of 8.25 per cent for two years on offer from the Cheltenham & Gloucester Building Society. This comes out at an APR of 10.8 per cent. It looks pretty bizarre until you realise that the interest is taken over 25 years - two years at 8.25 per cent and 23 years at C&G's prevailing variable rate of 10.75 per cent.

The APR fares no better on credit cards. Lloyds Bank is the first to drop its rate from 1.9 to 1.8 per cent a month, or from 25.3 per cent APR to 23.8 per cent APR.

But the APR relies on making assumptions about the credit limit, and how it is repaid, which means there are huge inconsistencies when comparing rates. The Bank of Scotland and Clydesdale Bank both have a pounds 10 annual fee and monthly interest of 1.9 per cent, but the Bank of Scotland ends up with an APR of 26 per cent, and the Clydesdale with one of 26.6 per cent. Barclaycard has the same fee and a lower rate (1.85 per cent) but a higher APR of 28.5 per cent.

Things are likely to become more confused, as moves are afoot to harmonise the calculations across the EC.

The credit card industry says the monthly interest rates are a truer guide to the cost of borrowing on plastic.

But at least changing 2 per cent a month into something like 28 per cent APR rings some warning bells that this sort of borrowing can be expensive. And if the rate were to creep up, say, to 4 per cent a month, it may sound small but it equates with interest rates of more than 60 per cent taken over a year.

The moral of the tale is that now interest rates are on the move and are being scrutinised, be careful that you are watching a rate that means what you think it means.

THE fall in rates is just what the property market has been waiting for - but this is not the trigger that is going to set the market alight. A few more buyers will decide that now is the time to move, but every time a prospective buyer ventures on to a street littered with 'for sale' boards, a dozen more properties are likely to come on the market.

Repossessed houses, inherited homes being mothballed for a better price, and those who have been delaying a move, all will start to try their luck.

So while the number of sales should start to rise, prices are unlikely to be going anywhere. The best that homeowners can hope for is that prices have stopped falling and will start to put on a pound or two next year. But at least they can begin to contemplate moving.

THE National Savings fixed-rate cupboard is bare at the moment. The wares were cleared from the shelves on Tuesday evening and we are still awaiting replacements.

National Savings must be a little sensitive about getting its rates right this time, after the furore when the building societies blamed National Savings for an outflow of funds and threatened to raise rates - savings and mortgages - to stem the tide. They were only stopped when the interest rate on the First Option Bond was cut after just a couple of weeks.

But the 5th Issue index-linked savings certificates, which pay inflation plus 4.5 per cent after five years, are a good two-way bet. If inflation is on the way back, a secure real return of 4.5 per cent will be an amazing bargain, and even if inflation stays at, say, 4 per cent, a return of over twice the inflation rate will still look good.

And if you don't like the way things are going, you can get out after a year with full index-linking.