Mortgage News & Information - Issue 40, 20 May 2011

The Interest Rate Dilemma?

The choice between a variable tracker-rate, or a fixed-rate is always difficult, but never more so than now, with Bank of England base rate remaining at a record low. "Should I take advantage of a low tracker-rate, or pay more for a fixed-rate in the expectation that base-rate will increase at some point? And, if I do take a fixed-rate, what term should I choose?" - are frequent questions.

Nobody really knows what will happen to rates in the future, so the choice between a tracker-rate and a fixed-rate becomes a gamble. The decision is about whether you are prepared to take a risk with the family finances.

The lowest rate lifetime tracker schemes are just under 2.40% (1.9% above base rate). By comparison the lowest fixed-rate schemes are around 2.75% for 2-years, rising for longer terms to 4.19% for 5-years.

Therefore the benefit of the tracker against the 2-year fixed scheme would be eliminated by a 0.5% rise in base rate in the short term.  Furthermore, if base rate increased by an average of 1.8% over 5 years the tracker would be more expensive than the 5-year fix. Nobody can be sure that such an increase won't occur.

To get the impact of rate rises into perspective, it is worth remembering that, on a mortgage of £120,000, a 1% rise in base rate will increase mortgage payments by £100 per month. How many household budgets can easily accommodate that?

If you can't accommodate that, or are unwilling to gamble, here are some choices:

1. A fixed rate scheme.
2. A tracker scheme where the lender will allow you to switch to one of its own fixed-rates at any time, without paying an Early Repayment Charge (ERC).
3. A tracker scheme that has no ERC, so you can switch to the most competitive fixed-rate scheme in the market, when you wish
4. Hedge your bets by putting part of your mortgage on a tracker-rate and part on a fixed-rate. Some lenders will allow this.

New "Rate Basket"

In conjunction with our "Best-buys" tables we are launching the "Rate Basket", which will provide an ongoing indication of overall mortgage rates. The Rate-Basket will show how the money-market rate movements, detailed below, translate into rates actually offered by lenders.

The "Rate-Basket" simply tracks the average of the rates detailed in the Best-Buys tables on our website (see link to the right). The averaging commenced on 15 March at a figure of 3.29% and has increased gradually to 3.34%.

3-month Libor has remained at 0.82%

"Buying 14% more Affordable than Renting"

Tenants in rented properties pay nearly £100 a month more than people paying a mortgage.

The Halifax says that the average cost associated with buying a three-bedroom home stood at £608 a month in March, 14 per cent less than the £706 it would have cost to rent a property of the same size.

Three years ago the average cost of buying was 43 per cent higher than the cost of renting. In March 2010 renting was 7 per cent more expensive than buying.

Halifax's Buying versus Renting Review tracks the cost of mortgage payments, income on interest lost by using savings to fund a deposit, and spending on household maintenance against the cost of paying rent.

The drop in the cost of buying compared with renting has been driven by a fall in the average mortgage rate for new borrowers from 5.82 per cent in March 2008 to 3.59 per cent in March this year, cutting average monthly payments by 39 per cent.

However, stricter lending criteria and the requirement for larger deposits have frozen many would-be first-time buyers out of the market.

Lender News

Kensington launches 85% Loan-to-Value, Buy-to-Let scheme

Kensington Mortgage has just stretched the boundaries of the BTL mortgage by launching an 85% LTV scheme.

They are offering a 5.99%, 2-year fixed rate with a lender fee of 2.5%.

Rental/interest cover is set ay 120%.

Northern Rock has cut rates by up to 0.57% across its Everyday mortgage range.

90% LTV products now available to all approved intermediaries, with fixed rates starting from 5.65% with no additional product fee

2-Year Fixed rates now start at 3.25% and 2-Year Trackers start from 2.49%. Both of these products are available for purchase customers at 70% LTV with a £995 product fee. 

Woolwich's range of fixed rate mortgages has been cut further following the reductions before Easter.

These include the introduction of a three year fixed rate at 3.99 per cent (70 per cent loan to value) with a lower application fee of £499 and extending the loyalty range giving Barclays customers better mortgage deals up to 85 per cent loan to value (LTV).

Nationwide is to launch Save to Buy - an account for first-time buyers to save regularly towards their deposit that also enables them to apply for a 95% LTV mortgage.

The account will be available from May 6 2011, on a direct only basis.

Save to Buy will offer first-time buyers a regular savings account paying a rate of 2.5% gross p.a./AER variable on balances up to £20,000.  

The account can be opened with £50 and customers have to save at least £50 per month, plus customers have the flexibility of not paying the minimum monthly amount for up to three months during a rolling 12-month period. If the first-time buyer goes on to take out a Nationwide 95% LTV mortgage, there is also a cash-back reward of up to £1,000.

For first-time buyers to be eligible to apply for a Nationwide 95% LTV deposit mortgage, they must have been saving in Save to Buy for between six months and three years. They will then be eligible to apply for a 95% LTV mortgage that were previously exclusively available to existing customers moving home.