Spring Property Survey: Look with care for the best deals on loans: Mortgages / Variable or fixed rate packages? Either way, it's a buyer's market, reports Andrew Bibby

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The Independent Online
THIS IS a confusing time to be hunting for a mortgage.

House-buyers face a bewildering choice, with lenders changing their mortgage rates and packages often as frequently as once a fortnight. This means that last week's special offer may have already been withdrawn, while today's bargain may not look so attractive in a few weeks' time.

Proceed with care, bearing in mind that there is no shortage of money waiting to be lent out. For most borrowers looking for a mortgage, it is a buyer's market.

Attention this year has focused on fixed-rate mortgage packages - that is, loans where the rate of interest is fixed for the initial period - typically two, three or five years. More than half of all new mortgages now have some fixed-rate element.

'First time buyers tend to find the two and three year fixed-rates a better option from their point of view, while second time buyers tend to go for longer periods,' says Mike Cartwright, assistant general manager for consumer lending at the Halifax, Britain's largest building society.

The Halifax is reviewing its fixed-rate mortgages on Friday but currently offers a two-year fix at 6.99 per cent, three years at 7.49 per cent, four years at 7.99 per cent, five years at 8.49 per cent and 10 years at 8.99 per cent. (The standard variable rate is currently 7.64 per cent).

Other lenders are undercutting the Halifax quite substantially, and five-year fixes at 8 per cent or below can still be found. However, movement in recent weeks has been steadily upwards. Abbey National, for example, last week pushed up its three-year fix from 6.85 per cent to 7.25 per cent and its four-year fix from 7.25 per cent to 7.55 per cent. Nationwide similarly increased its rates on Monday this week.

Lenders fund fixed-rate mortgages from the wholesale money markets rather than from depositors' savings, and the increases reflect movements in bond prices. 'You might expect interest rates in Europe to have further to fall, but the bond markets are affected more by world events. Rates have hardened in recent weeks,' says Mike Cartwright.

The mortgage industry is therefore swinging back to re-emphasising variable rate mortgages, with building societies and other lenders vying to develop tempting marketing ploys.

Lloyds Bank, for example, offers a range of discounts; how much you get off (the discount varies from 1 per cent to 2.25 per cent) depends on whether you are a first time buyer, whether you are an existing Lloyds customer, and on how much you are borrowing. The Halifax has an even more complex structure of discounts, with reductions linked to the percentage of the purchase price being borrowed.

Cash incentives are also being widely used as a come-on for variable rate mortgages. Nationwide, for example, offers a pounds 400 'cashback' and free valuation for loans of up to 85 per cent of house value, and pounds 200 back in other cases. Barclays has a pounds 500 cashback scheme for borrowers taking a standard variable mortgage, and a pounds 250 incentive for those also taking advantage of the bank's range of one-year discounts.

According to the Alliance and Leicester, incentives like these may make many more borrowers opt for variable rate mortgages. 'The majority of our mortgages in the last six months have been fixed-rate. But now that fixed-rates are becoming more expensive, that could well change,' said a spokesman for the society.

While a variable rate mortgage may now mean lower initial mortgage payments, a fix may still be worth considering, according to Walter Avrili, operations director with the mortgage broking firm, John Charcol.

'I advocate a safety first approach. Movements in interest rates could mean that people with variable rate mortgages come unstuck,' he says. About 80 per cent of mortgages arranged through John Charcol are fixed-rate, he adds.

Home-buyers searching for the best mortgage deal must also watch out for the conditions which lenders may impose in the small print. 'Compulsory insurance can add a substantial amount to the cost of a mortgage,' says Walter Avrili. 'Commission on buildings and contents insurance is a big earner for societies.'

The sale of endowment policies, and other investment products such as PEPs and personal pensions, are a further additional source of profit for mortgage lenders. As a consequence, many superficially attractive mortgage packages may oblige borrowers to take out an endowment or other investment policy.

The point here is not simply that a straightforward repayment mortgage may be more appropriate for many people. It is also that borrowers normally have little control over the insurance company chosen for their investment.

Most building societies (an honourable exception is the Bradford and Bingley) are tied to selling the products of a single insurance company whilst larger societies are increasingly competing directly with the banks by establishing their own life insurance arms.

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