Tuesday 28 June 2011

Mortgages rates fall to record low

Banks are now offering some of the cheapest mortgage deals ever – but many home owners still can't get at them.
The cost of both fixed-rate mortgages and tracker deals has tumbled in recent weeks, as fears of an imminent rise in interest rates recedes.
With the economy still struggling, most people do not now expect the Bank of England to raise rates until 2012 at the earliest, with some commentators suggesting the Bank Rate could stay at 0.5 per cent until 2013.
Against this background banks have been gradually reducing the cost of their home loans. According to Moneyfacts, the average two-year fixed rate mortgage is just 4.32 per cent, the average five-year fixed rate deal is 5.29 per cent, while those opting for a two-year tracker deal – where monthly mortgage repayments will move in line with the Bank Rate – will pay an average of just 3.37 per cent. Moneyfacts says these are the lowest rates it has seen since 1988.
But banks and building societies are still extremely wary about whom they will lend money to, and lending restrictions remain tight. As a result it is only those who have significant equity in their home who can access the cheapest rates. And with house prices sliding in many parts of the country, more home owners will find their equity squeezed, potentially making it harder for them to get an affordable deal.

Fact

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Whether you are looking to buy, move or simply remortgage we look at the best mortgage options available.

First-time buyers

The cheapest fixed-rate deals now charge interest at less than 4 per cent, but first-time buyers will pay substantially more even if they can scrape together the necessary deposit. Typically these buyers will be paying more than 6 per cent interest if they want the security of a longer-term fixed-rate deal.
Prior to the credit crunch, 100 per cent mortgages were commonplace. These have all but disappeared, with most lenders providing mortgages only if buyers can put down at least a 10 per cent deposit. David Hollingworth, of brokers London & Country, says: "We've started to see lenders offering deals which just need a 5 per cent deposit. But the rates are very uncompetitive.
"You will have more choice, and a better rate, if you can save a 10 per cent deposit. But even here you will pay a premium"
Melanie Bien, of the independent brokers Private Finance, says: "For first-time buyers a fixed-rate deal can help with budgeting, as they know their monthly mortgage payments won't increase when interest rates rise."
She says shorter two-year fixes may be cheaper, but could leave borrowers remortgaging again just as rates rise. "A longer five-year fix should provide more peace of mind for cash-strapped first-time buyers. But there is a risk that if interest rates don't rise then you have been paying over the odds for this protection," she says.
The Co-operative Bank currently offers one of the cheaper five-year fixes for those borrowing 90 per cent of their property's value. It charges 5.89 per cent with a £999 fee, or 6.19 per cent interest with no fee.
For those gambling on interest rates staying low, HSBC offers a lifetime tracker which charges 4.19 per cent above the Bank Rate (giving a current pay rate of 4.68 per cent).
Remortgaging
It used to be commonplace to remortgage every two to three years. Why stick with your lender's uncompetitive standard variable rate (SVR) when you could take advantage of low-cost fixed and discounted deals? But thanks to the low Bank Rate, many lenders now have very competitive SVR deals. C&G and Nationwide building societies, for example, have an SVR of just 2.5 per cent. Not surprisingly, four in 10 home owners are simply sitting on these SVR rates.
Ms Bien says: "If you are one of the lucky ones paying 3 per cent or less it will be tempting to enjoy the low interest rates for a while longer. The sensible borrower will be overpaying on their mortgage each month, both to reduce the outstanding capital and to make it easier to cope with any payment shock when interest rates do start to rise."
But not all lenders have such competitive SVRs. Some building societies are charging rates closer to 6 per cent. "If you are on one of these rates, then you should be able to remortgage onto a cheaper deal, provided you have sufficient equity in your home," she says.
Again, the key question is whether to opt for a fixed or tracker rate. "There is a lot of nervousness about future interest rate rises," says David Hollingworth. One option, he says, is a "drop lock" or "switch to fix" deal. With these, borrowers get a cheaper tracker deal now, but retain the right to switch into a fixed-rate one at a later stage without paying a penalty.
Similarly, look at the lifetime trackers offered by ING Direct, First Direct and HSBC, which offer competitive rates, but no early redemption charges should you need to remortgage at a later date. First Direct, for example, charges just 2.89 per cent at present – although this will increase when interest rates rise.
Last-time buyers
Those who have been on the property ladder for 20 years or more probably aren't particularly troubled by the latest dip in house prices. Most of these home owners will have substantial equity in their home and are in a prime position to take advantage of some of the cheapest rates around.
Nationwide, for example, is offering a two-year fixed-rate deal at just 2.99 per cent (plus a £400 fixed fee). However, this deal is only available to those borrowing half of their property's current value.
For those wanting a longer-term fix, Chelsea Building Society is offering a five-year deal at 3.89 per cent (with a £1,995 fee). Again, home owners need a substantial chunk of equity in their home to take advantage of this offer, as it's only available to those borrowing up to 60 per cent of their property's value.
"Although you are still paying a premium to fix your rate, this is an extremely attractive offer," says David Hollingworth. "It will be cheaper than many lenders' SVRs, but offers protection against future rate hikes." £box light

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