Money news, advice and predictions for savers and spenders. This week: winners and losers in the current turbulent market.
By Jeremy Gates
Interest rates have probably sunk as low as they can go, and as the Bank of England starts pumping another £75bn into the economy by buying bonds and corporate debt from banks, millions of homebuyers, and others keen to buy, need a 'safety first' strategy through a severe downturn.
The past year produced big winners and losers among borrowers.
The winners are 3.5m borrowers on tracker loans - including many buy-to-let landlords - who enjoyed an unexpected windfall, especially if no collar was in place to peg their rate at a specified level.
Ray Boulger at leading brokers John Charcol says: "The latest base rate cut to an historic low of 0.5% means many borrowers have wiped roughly 90% off monthly repayments on interest-only loans.
"Someone with an interest-only mortgage of £150,000 and rate equivalent to Bank rate, was paying £625 a month six months ago. Now, they're paying just £62.50 after this latest reduction. Some borrowers with deals priced below Bank Rate are paying nothing."
Some borrowers on Standard Variable Rate (SVR) deals - often the easy option when fixes expire - have thrived too. C&G and Nationwide have an underlying guarantee to be never more than 2% above base rate, while Halifax and Skipton are never more than 3% above.
The big losers are on fixed rate loans, some paying rates as high as 6.5% for another 18 months.
In the toughest scenario, their LTV (loan to value) ratios may be so high - as prices fall - that it is near impossible for them to switch lenders. Up to 500,000 borrowers could fall three months behind on repayments this year.
Borrowers trying to escape a fix before it expires can be clobbered by early repayment charges running into five figures: the 10-year fix from Britannia BS, for instance, makes a chance in the first three years of 8% of the sum outstanding.
So how should borrowers handle a mortgage market trickier than it has been in living memory?
Rule one: wherever possible overpay monthly repayments, to grow the level of equity in your home faster, which makes it easier to get a good deal on the next mortgage.
HSBC says a typical borrower taking a tracker mortgage in October 2008 for £112,756 is now saving over £218 per month on their initial payment. By leaving repayments unchanged, they will pay off their mortgage nine years and three months early, saving nearly £14,000 in interest charges.
Second: think hard about the best moment to take a fix. As house prices keep falling, borrowers could be squeezed by the LTV (loan-to-value) limit on their loan if they seek a new lender.
Cath Hearnden, at My Mortgage Direct says: "A lot depends on what your house is worth. Those with loans near 75% LTV should look at a longer term fix, because they could come unstuck in a couple of years if prices keep falling and they have to move."
Two-year fixes could be risky too. By exposing borrowers to a steep rise in repayments when they need another loan, they could be blocked out altogether if prices fall much lower.
The five-year fix looks a safer passage through the storm: monthly outgoings are fixed, and the worst should be passed when it expires.
The latest Bank of England moves could cut five-year fixed rates, and perhaps 10-year rates too, by a wider margin. More lenders will offer 15-year fixes, as the cost of long-term funds falls significantly.
Boulger says a Leeds BS 10-year fix at 4.75% could soon be down to 4.50%.
"While the best five-year fixes, from Abbey and HSBC, at just under 4% allow a maximum LTV of 60%, other lenders could go closer to 4%. Currently borrowers are looking at 4.75%, to a maximum LTV of 75%."
Boulger also likes Northern Rock's five-year fix at 4.69%, with maximum LTV 65%.
"All their fixes are totally flexible," he says, "which means borrowers can make overpayments without limit, with no penalties or early repayment charges. Most lenders only allow overpayments up to 10% before they impose a charge."
Boulger says a Britannia BS 15-year fix - at 5.94% up to 60% LTV, 6.19% up to 75% LTV and 6.54% up to 85% LTV - could be useful shield if inflation really lifts off some way down the line.
"The big attraction is that Britannia opens a window every three years, allowing borrowers to redeem all the loan with no early repayment charge. For borrowers with smaller deposits, the package represents reasonable price to pay for the security of a long-term fix."
Big lenders have new products to attract safer customers.
HSBC - set to lend £15bn in retail mortgage in 2009, double its 2007 total - is widening its range of fixes.
To a two-year deal at 2.89%, it is adding a five-year deal at 3.99% and a 10-year loan at 4.98%, all with maximum LTV of 60%. Rates are slightly higher on HSBC loans up to 75%.
Abbey this week launched a new five-year fix at 3.95% (max LTV 60%) to maximum £250,000, alongside a two-year fix at 2.99% (max LTV 60%).
Existing borrowers moving home or switching products can go up to 95% LTV on three new Nationwide BS loans: a two-year tracker from 3.63% (new borrowers allowed up to 75% LTV); a three year tracker from 3.58% (and a five-year fix from 4.98%.
New customers can go up to 75% LTV for the first two, and up to 85% on the last.
Richard Morea at L&C Mortgages thinks two new capped trackers mark an interesting trend.
The Woolwich lifetime tracker at base rate plus 2.99% (currently 3.49%) is capped at 5.99% until April 2012, while the Coventry BS tracker, also at base rate plus 2.99%, has a three-year cap at 4.99%. Fees are £995 and £999 respectively.
For first-time buyers, chances of a fix around 6% are higher if they have a 15% deposit - possibly helped with a loan from their parents.
Hearnden says: "If first-time buyers find a 20% deposit, the rate is in the 5+ range, and may be even in the high 4s. But most first-timers are simply nowhere near the level of deposit which lenders want."
Many borrowers are sitting out the storm on comfortable Standard Variable Rates (SVRs), which can be as cheap as 3% at C&G, or as expensive as 4.8% at Bank of Scotland. But they could be caught if rates rise.
"Some of these borrowers might not eventually have the option of a fix, if prices keep falling and their LTV rises," she says.
"SVRs might look fantastic now, but they could be going up as house prices fall."
The price comparison service uSwitch.com points out, that this might be the moment for offset mortgage to come into their own, for customers who hold savings with, and borrow from, the same financial institution.
By allowing borrowers to set interest earned on savings against interest charges, offset loans- pioneered by Woolwich and Intelligent Finance- allow savers to get at least some return on their money, says uSwitch.
However, the advantages of offset loans are clearest when rates are high - and higher rate taxpayers risk a big tax bill on earned interest. The attractions are diminished when rates are low.
:: INFORMATION: Charcol (0800 718 191 and www.charcol.co.uk); My Mortgage Direct (01342 837 421 and www.mymortgagedirect.co.uk); uSwitch.com (0800 093 0607 and www.uSwitch.com); L&C Mortgages (0800 373 300 and www.lcplc.co.uk);
POUNDNOTES
:: Barclays Golden Cash ISA promising 3.55% gross (3.61% AER) available to new and existing customers on minimum £1 deposits is being acclaimed a 'best buy', although that impressive figure does include a 1% bonus for the first 12 months.
Annie Shaw at CashQuestions.com reckons Barclays outpoints the NatWest ISA by not requiring investors to have another account with the bank. But Barclays don't allow transfers in from other ISAs, whereas Natwest does.
One rival to Barclays is the M&S Advantage Cash ISA, where over twice as many accounts have opened since January compared with the whole of 2008. The 3.10% rate includes a 1% bonus until April 21, 2010, after which the rate becomes 2.10% variable.
Early withdrawals are permitted during the term, but will be charged a fixed flat withdrawal charge (£50 for one-year term, £75 for two-year term, £100 for three-year term).
Barclays enquiries: 0800 494 949 and www.barclays.co.uk/isa. M&S Money: 0808 002 2222 and www.marksand spencer.com/isa.
:: Regular savers have seen rates on their accounts more than halve over the past year - from 5.56% in March 2008 to an average 2.64% for savers committed to making regular payments for a year - and there's more pain to come, warns finance website MoneyExpert.com.
Sean Gardner at MoneyExpert.com says: "Savers are bearing the brunt of the Bank of England's efforts to stave off a prolonged recession."
However, the Abbey subsidiary Cater Allen Private Bank is launching two highly competitive fixed rate bonds, paying up to 4.11% AER depending on sum invested.
Two-year bonds pay from 3.68% AER on £5,000-50,000, while the three-year bond pays 3.85% on a similar range of deposits. The wealthy putting in £1m plus get 4% AER over two years, and 4.11% over three.
For smaller savers, Bradford & Bingley's new fixed rate monthly saver promises 5% gross, fixed for 12 months on monthly savings of £20-£250 by standing order. When one withdrawal is made, the rate falls to 4.69%.
Cater Allen enquiries: 0800 092 3300 and www.caterallen.co.uk. B&B enquiries to local branches.
:: Although London shares are plunging, nearly 16m Brits expect to look back on this period as a good time to buy shares, claims mutual insurance and investment group LV=. But its survey says only one in three current investors has the nerve to put more money into the market.
With weeks to go before the end of the 2008/9 financial year on April 5, leading execution-only broker TD Waterhouse says the top five funds for equity ISAs are Blackrock Gold & General (1), followed by Invesco Perpetual High Income (Accumulation), Gartmore China Opportunities, Invesco Perpetual High Income (Income) and Jupiter Financial Opportunities.
TD Waterhouse enquiries: 0845 607 6001 and www.tdwaterhouse.co.uk.
:: More than two thirds of Britons have at least one credit card, says a survey from Abbey, and they pay more than £9bn in card interest each year. The average outstanding credit card debt is £3,256 and less than a quarter of the total credit card debt is on a 0% deal.
Abbey reckons men have more credit card debt (£3,627) than women (£2,778), while Londoners have the most debt (£3,649) and the Midlanders the lowest (£2,503).
Abbey head of credit cards Callum Gibson says: "By transferring an outstanding card balance to a 0% deal, Britons could save an average £443 a year, a huge saving in today's difficult economic climate."
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 4.10% HiSAVE Fixed Rate 24 Month Bond £1,000 OM
Abbey 0800 234 6060 4.01% (F) Fixed Rate Savings Bond 01/04/11 £30,000 Yly
West Bromwich BS 0845 3300 622 3.50% High Income Over 65 90 Day (D) £5,000 Mly
FirstSave www.firstsave.co.uk 3.45% 90 Day Notice 90 Days £100 Yly
NatWest 0800 200 400 3.45% Cash ISA Plus Instant £1 Mly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.89% for term 80% £799 Yes
HSBC 0800 494 999 2.95% for term 60% £799 Yes
Hanley Economic BS 01782 255 000 3.39% for two years 80% £799 Yes
Market Harboro' BS 01858 412 250 3.49% for two years 75% £595 Yes
Co-Op Bank 0800 633 5286 3.64% to 31/03/12 75% £995 Yes
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)
