An expensive home loan without a cause

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The Independent Online

The latest cut in interest rates is excellent news for home owners. The surprise half-point reduction brought the base rate down to 4 per cent – its lowest level since 1955, when James Dean's Rebel Without a Cause was first shown.

Many mortgage lenders – including Intelligent Finance, HSBC and Virgin One – passed the full cut on to borrowers immediately. Halifax did the same for new borrowers on its standard variable rate (SVR), and existing customers will feel the benefit next month, when Nationwide will follow suit, bringing its base mortgage rate to 4.74 per cent. This means someone with a £100,000 repayment-only loan will save £29.11 a month.

Abbey National and Cheltenham & Gloucester will cut their rates, but only by 0.4 per cent to protect savers. Alliance & Leicester, Bradford & Bingley, Barclays and Woolwich are reviewing their deals.

"Rates could quite easily fall further," says Alex Bannister, group economist at Nationwide. "What is the advantage of pausing now? It is not impossible they will come down at least another 0.5 per cent, and that might not be the end of it.

"But once they hit 3.5 per cent [the Bank of England] will surely be thinking they are near enough the bottom. The trouble is, it takes such a long time for rate cuts to feed through that if [the Bank] goes too far, it won't know until it's too late."

Mr Bannister feels that after a couple more cuts, the Bank will pause to see what effect they have on the market. He then expects rates to rise again in 2002. "I envisage that they will be pushing towards 5 per cent by the end of next year. They could move up quite sharply, but it is conditional on some recovery in the US."

So how should you take advantage of these rate cuts? Although SVRs are low, you can nearly always get a better deal on a fixed or discounted rate. There are plenty of good offers to choose from.

A fixed rate would suit somebody who likes to budget and wants to know how much they will be repaying over two, three or five years. Mortgage broker Charcol is offering an exclusive five-year fixed- rate deal from the Portman Building Society at 4.99 per cent until 1 December 2006. Maximum loan to value (LTV) is 95 per cent and there are no redemption penalties after the fixed period. A lender's arrangement fee of £500 applies, and Charcol also charges a £49 booking fee.

It remains to be seen if cheaper fixed- rate deals are introduced in response to the cut. "The danger is you will miss out on a good rate if you wait," warns David Hollingworth at mortgage broker London & Country. "If you see a fix that looks attractive, you would do well to take it."

Bigger savings can be made on discounted deals but you will have to cope with fluctuations in payments should interest rates go up or down. "If you need certainty you should fix," says Mark Harris, director at Savills Private Finance, a mortgage broker. "But if you are prepared to take a punt, opt for a tracker or discount mortgage." Savills is offering a 2.5 per cent discount over two years, linked to the base rate, giving a current payable rate of 3 per cent. Maximum loan to value is 75 per cent and there is an arrangement fee of £325. Redemption penalties apply only within the discounted period.

Mr Hollingworth recommends Abbey National's two-year discount of 1.1 per cent, giving a current payable rate of 3.9 per cent. There are no fees and free valuation.

Contacts: Abbey National, 0800 555100; Charcol, 0800 718191; London & Country, 0800 953 0456; Savills, 0870 900 7762.

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