Money news, advice and predictions for savers and spenders. This week: the base rate cut is taking a while to trickle down to borrowers.
By Jeremy Gates
Although the surprise 1.5% cut in base rate (BR) by the Bank of England sends rates to their lowest level since 1954, the benefits are trickling down slowly to existing borrowers and anybody still brave enough to buy.
With lenders still fixing rates in response, Michelle Slade at Moneyfacts.co.uk says: "With base rate cut twice in five weeks from 5% to 3%, borrowers expect to feel the benefit and they want to see the cost of mortgages across the board coming down.
"In fact the average two-year fixed rate at 6.13% today is not down much on the figure of 6.59% in early May. Even allowing for a larger risk margin, the average fixed rate should be at least 1% lower, if not more."
With talk of rates hitting 0% if the Bank of England deems it appropriate, borrowers are bound to pay close attention to tracker mortgages moving in line with base rate.
Here, too, lenders' response has been disappointing. They argue their rates have to reflect LIBOR - the rate at which banks lend money to each other - which is considerably higher than base rate.
The new range of trackers from Halifax, Britain's biggest lender includes a two-year deal at 5.19% - or 2.19% above base rate, or a five-year deal at 5.39%. Both have a maximum Loan-To-Value (LTV) ratio of 75%.
Abbey's revised range of trackers includes a two-year 4.89% loan with £499 fee for LTVs up to 60%, and a 4.99% loan, with £995 fee for LTVs up to 75%.
The clear winners among borrowers are those already locked into base rate trackers - probably around 35% of all borrowers - who get the full benefit of the 1.5% cut. They could save over £100 per month on a £100,000 loan.
Anybody who took a tracker offered by Cheltenham & Gloucester, an offshoot of Lloyds TSB - at Bank rate minus 1.01% - in autumn 2007 is now enjoying an astonishing rate of 1.99%, and paying only £166 per month for a £100,000 interest-only loan.
By contrast, those who arranged new fixed rate loans in July - when the average rate peaked at 7.08% - is looking ruefully at new deals in the market.
Today, a two-year fix from Cheltenham & Gloucester costs at 4.49% - albeit with a hefty 2.5% fee. Abbey's two year fix at 4.49%, with fee of £1,499, free valuation and legals, is for remortgagers only.
With the future so uncertain, the case is strengthening for sitting tight on a boring SVR loan - before jumping onto something better a few months down the line.
Only 19 lenders out of 96 lenders offering SVR loans have passed on the full 1.5% cut, while Earl Shilton BS is down by 1.1%, but that probably covers about 50% of all borrowers on SVR loans, about 10% of the total.
SVR borrowers granted the full cut include hapless souls hanging on at Northern Rock, sometimes because they haven't enough equity in their home to go elsewhere; their SVR now falls to 5.84%.
SVR rates can vary hugely: a Moneyfacts survey shows borrowers on SVRs repaying a £150,000 loan with Stafford Railway BS, First Direct and ING Direct paid less than £9,500 in the year from November 2007. Others with Birmingham Midshires Solutions, Ulster Bank (NI), Darlington BS and Kent Reliance BS all paid more than £11,400.
Tracker mortgages which saw the greatest carnage last week when the Bank made its dramatic move: all 30 lenders swiftly scrapped them.
A handful have trickled back, several with 'collars'- including Skipton, Yorkshire and Accord - to prevent the rate going below 3%. Nationwide BS has a collar at 2.75%. The collar establishes the lowest rate which will be charged, regardless of how low base rate actually goes.
Ray Boulger, senior technical manager at brokers John Charcol, says: "There is a good argument for not rushing into any new deal, while big lenders are reluctant to set out their stall ahead of rivals.
"We'll have a clearer picture when Nationwide BS, RBS and Woolwich set new rates soon".
Boulger says trackers are an obvious bet as rates fall - "but the problem is finding a decent one. None accept an LTV above 75%.
"Most are around BBR plus 2%, by the time you factor in the arrangement fee; for instance, Alliance & Leicester has a two year deal at BBR plus 1.89%, so the 1% fee means the effective rate is 5.39%.
"The emergence of the collar on trackers introduces an element of uncertainty. For example, Halifax retains the right to adjust its tracker margin if base rate goes below 3%. So borrowers might not benefit in full if falls in base rate continue.
"However, if you want a tracker, there is little point holding off in the hope that other lenders emerge. I don't expect margins on trackers to get much more generous", says Boulger.
"Remember also that some mortgage offers are valid for six months, so there is little to be lost by applying now."
Borrowers nearing the end of current fixes might be best-advised to stay for a few months on an SVR - on the assumption that lower fixes can be expected to follow this latest plunge in rates.
A new generation of fixes, probably emerging over the next few weeks, is likely to favour borrowers who can accept a lower LTV of, say, 60% at the expense of those who need to borrow up to 80% LTV.
So far as existing borrowers are concerned, Drew Wotherspoon at John Charcol is urging them to turn adversity into advantage - by maintaining monthly payments unchanged as rates fall.
This overpayment could enable them to save thousands of pounds by paying loans off early.
On a £200,000 mortgage where the rate has dropped from 6% to 4%, a borrower continuing to repay £1,288 per month will make a £233 overpayment. That could save nearly £35,000 in interest charges and slash the repayment period by nearly seven years.
Drew Wotherspoon says: "If rates were to fall even lower, the potential savings for borrowers who leave monthly payments unchanged would be even greater. Of course, borrowers with expensive debt elsewhere, like credit cards, should pay these off first before they tackle mortgage debt."
:: INFORMATION: John Charcol (0800 718191 and www.charcol.co.uk).
POUNDNOTES
:: Although the enthusiasm of older homeowners to unlock capital from their homes by equity release schemes has been dented this year by falling house prices, Norwich Union (NU) has marked its tenth anniversary in the sector with an analysis which predicts the volume of money unlocked will double to £2.4bn per year by 2013, against £1.2bn in 2007.
In its first decade, NU enabled over 80,000 customers to release £2.8bn worth of equity. Almost 60% of its current sales are 'drawdowns' which reserve a 'pot of equity' to be taken when it is needed.
NU says the market will be rapidly expanded by weaker pension funding, longer retirements, and Government policy to get pensioners to help themselves wherever possible.
Prudential's latest Equity Releaser Index says the over-65s still have £693bn locked up in bricks and mortar, around 42% of that held by homeowners in London and the South-East.
Prudential product information is on www.pru.co.uk.
:: Savers hammered by the fall in rates might find refuge in the new range of bonds - from three months to six years - from Nationwide BS.
Best rate is 5.25% gross on three-year Loyalty Fixed Rate Bonds, available to members of at least three years' standing, and a six-month fixed rate bond at 5% gross could be a short-term haven. ISA fixed rates over one, two and three years are all 4.75%.
:: Credit card holders beware: despite recent rate cuts, Moneyfacts says card companies have been quietly stepping up their charges to ensure that careless consumers are "stung more severely than ever before".
Moneyfacts says that in the last three months, the average rate across all cards is up from, 16.8% to 17.2%, while big name brands including MINT, NatWest, RBS and Capital One Bank have withdrawn 0% balance transfer deals altogether.
Michelle Slade at Moneyfacts says: "Paying just the minimum is the most expensive mistake many consumers can make. If you can't repay in full, then even paying £10 or £20 over the minimum could reduce significantly the amount of interest and time to repay the debt."
:: Homeowners don't realise how much they have actually lost on the value of their homes, says Impartial.co.uk, the free 'find a mortgage advisor service'. It says the average homeowner estimates their home is down by just £1,233 in the last three months, from £202,231 to £200,998, a decrease of less than 0.1%. The actual fall could be 60 times as large.
Under-34 year olds actually think their homes are still rising in value, says Impartial.co.uk. But the average Londoner is more clued up, believing their home has dropped by £46,000.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 6.60% (F) HiSAVE Fixed Rate 12 Month Bond £1,000 OM
Anglo Irish Bank 0845 455 2222 7.05% (F) Fixed Rate Bond One Year Bond £500 On maturity
Secure Trust Bank 0121 693 9111 6.57% 60 Day Notice 60 Days £1,000 Quarterly
Anglo Irish Bank 0845 455 2222 6.55% Seven Day Notice 2 Seven Days (B) £1 Yly
Capital One Savings capitalonesavings.co.uk 6.50% Bonus Saver 3 None £500 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 5.49% for term 90% £399 Yes
Mkt Harboro BS 01858 412250 5.49% for two years 75% £595 Yes
Abbey 0800 100802 5.54% to 2/2/14 75% £995 Yes
Barnsley BS 01226 733999 5.69% for two years 85% Yes
West Bromwich BS 0800 298 0008 5.89% to 30/12/18 75% £949 None
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
Nov 6/08
