Home owners 'stranded' by base rate cuts

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The Independent Online
THOUSANDS OF hapless borrowers who took out fixed mortgages two or three years ago at seemingly advantageous rates face the prospect of vastly higher monthly payments than the deals that are available today.

The sudden fall in base rates in the past three months, which on Thursday saw a further base rate cut to 6 per cent, has also led to a drop of about 1.5 points in the cost of a variable mortgage. This has left stranded many borrowers who tried to gamble on future interest rate movements.

Among the worst-affected borrowers are the many who opted for fixed rates between 1995 and the general election in May 1997. Before this, the money markets assumed that the election of a Labour government would lead to higher long-term interest rates.

Five-year and longer-term mortgages, heavily touted by some lenders at the time, were priced accordingly. In July 1995, for example, Abbey National offered a fixed-rate mortgage at 8.75 per cent, expiring in August 2000. Those who took that loan would now be paying 1.8 points more than a variable rate deal through Nationwide Building Society. On a pounds 100,000 interest-only loan, that means the fixed-rate loan is currently costing an extra pounds 140 a month.

At the Halifax, a five-year fixed mortgage in November 1996 was pegged at 8.55 per cent. Those who took one out are now paying pounds 666 a month on a pounds 100,000 loan, compared with the bank's current variable rate of pounds 602 a month.

In May 1997, five-year deals for first-time borrowers were pegged at 7.65 per cent - a repayment of pounds 618 a month for those who snapped one up. They are now discovering that they cannot switch to a better deal with another lender - or even move to their own mortgage provider's variable rate - because of the heavy redemption penalties. An unnamed mortgage broker said yesterday: "To be honest, I am constantly amazed at the stupidity of some people. They think a building society account is too risky, yet are willing to take a punt on long-term interest rates like some Liffe [London International Financial Futures Exchange] barrow-boy dealer. Fixed- rate mortgages are there for security, not to gamble on."

Ray Boulger, technical manager at John Charcol, the UK's largest mortgage broker, said: "One thing to remember is that fixed rates varied widely, even at their most expensive point. Anyone who took independent advice on their loan should still be okay because we were able to recommend the cheapest loans at any time. Moreover, we were also advising people against taking out longer-term fixes because they were too expensive."

A Halifax spokeswoman said: "There will be some people who took a loan out in that period who will find themselves paying considerably more now. But for a considerable period, when rates were higher, they actually gained."