FEAR OF FINANCE

The evidence of an upturn in the housing market is now too strong to be brushed off as a short-term rebound, although a really healthy market requires a higher level of turnover than the recent average of little more than a million deals a year. Much depends now on whether the millions of home-owners who have failed to sell their homes over the past five years and simply taken them off the market are willing to put them back up for sale at the first whiff of a price rise.

Having waited so long, many of them may decide to wait and see if the market really hots up so they can recoup more of the money they feel they have lost in the downturn. Until the supply of houses rises it will remain an imperfect market

The chances are that the log-jam is breaking up and a brisker market will develop, financed by extremely attractive mortgage rates and special deals. But there are already signs that mortgage lenders are reviewing some of the more generous extra incentives they are offering, in the belief that underlying demand is on the upturn.

This week Natwest Mortgage Services has ditched its one and two-year discount mortgages, to concentrate on its three-year discount and cash- back package. Abbey National has reduced the cash-backs it offers to remortgage customers from 5 per cent to 2 per cent. UCB Homeloans has cut its standard variable rate but shaved a quarter point off its popular two-year discount to leave the net rate unchanged.

The first incentive to be reviewed will be cash-backs, because they are immediate and upfront giveaways, whereas discounts on the standard variable rate come out of cash flow. Next to come under review will be remortgage deals offered to tempt customers of other lenders to pay off their existing loan and move lender without moving house. Although every lender likes to increase market share, this business is by definition a zero sum game. The discounts and cash-backs make new business unprofitable in the early years while profitable existing business is being poached by rival lenders.

Remortgages are especially unpopular with loyal existing customers, who unless they are both determined and tough cannot renegotiate with their existing lender. They see the incentives offered to others as a kind of disloyalty bonus.

Fixed-rate loans are also due for review. They are currently out of favour with borrowers eager to see if the Chancellor will push interest rates lower still. But as soon as the first sign of an up-tick in interest rates occurs, new and existing borrowers who are not already tied into a deal by heavy redemption penalties will start moving towards fixed rates.

Although there could still be another quarter-point cut in interest rates in lieu of tax cuts at Budget time, looking ahead the general view is that rates will rise next year.

For the past two years borrowers have had a relatively good deal at the expense of savers, but as Keith Scott, head of sales and marketing at NatWest Mortgage Services, points out, once the Halifax, the Woolwich and other societies have converted into banks a huge tidal wave of savers who have been suffering low savings rates because they are waiting for a conversion bonus will be released to look elsewhere.

At the same time the competition for savings from pensions, insurance and other financial products will also rise. Savings rates must rise, and borrowers will have to pay for them.