Come on, let's twist again

MORTGAGE rates for millions of borrowers tumbled again last week by up to 0.45 per cent, bringing the cost of home loans down to their lowest levels since the early Sixties.

The cuts followed the announcement on Friday morning by the Chancellor, Kenneth Clarke, that Bank of England base rates would fall to 6 per cent, a 0.25 point drop.

Within minutes of his move, Halifax replied by bringing down the cost of its variable rate mortgages from 7.49 to 7.25 per cent. Its decision was followed by Woolwich, Alliance & Leicester, Britannia Coventry and Newcastle building societies, plus Abbey National, Barclays and NatWest.

Northern Rock reacted by lopping even more off its variable rate, cutting the cost of its mortgages by 0.45 percentage points to a new low of 6.74 per cent. Its decision makes it the lowest-charging high-street lender.

How long the Rock keeps its title is another question. Both Nationwide and Bradford & Bingley said on Friday they are ready to bring their own rates further down. In Nationwide's case, its rate currently stands at 6.99 per cent.

In any event, Direct Line, the telephone insurer and now also a mortgage lender, has already dropped the cost of its own home loans to 6.25 per cent, in line with Bradford & Bingley Direct. A further cut from the Bingley's telephone lending arm is possible.

As always, there are opportunities for canny home buyers. But there are a number questions that need to be considered:

p Is this a sensible time to enter the mortgage market?

p What kind of mortgage is best at this time?

p What will happen to mortgage rates in the coming year or two?

p What happens if you are locked in to an unfavourable rate, particularly with a society planing to de-mutualise?

On the first point, both the Halifax and Nationwide house price indexes last week showed a substantial rise in property prices last month, the sixth in a row in the Halifax's case.

Although it seems unlikely that Halifax's 0.9 per cent rise for February will continue, the prospect of a gentle increase of between 2 and 3 per cent over the whole of 1996 has been boosted by last month's figures.

Coupled with the fall in mortgage rates over the past year - which bring down the cost of an average pounds 50,000 interest-only mortgage by about pounds 50 a month compared to a year ago (more in the case of some lenders) - it makes more sense to buy now than for several years.

As for the best rates to go for, the key point to remember is that if a borrower is already on a variable rate, he or she is losing hundreds of pounds or more each year compared to some of the best fixed and discounted rates now available on the market.

MoneyFacts, a specialist magazine with all the top savings and mortgage rates, shows Coventry Building Society with a two-year fixed rate of 3.95 per cent. Skipton comes in slightly lower, at 3.75 per cent.

For first-time buyers, Britannia offers 2.75 per cent off the new variable rate of 7.25 per cent, plus refunds of valuation and one year's free unemployment insurance. Nationwide is lopping 2.55 per cent off its variable rate for two years, while Greenwich takes 2.5 per cent off its variable rate, currently 7.49 per cent, for three years.

Both fixes and discounts are worth thinking about, so the next question to answer is where interest rates are likely to move to in the next year or two.

Most experts believe that despite the drop in variable mortgage rates, the long-term discount and fixed market is moving in the opposite direction.

Nick Deutsch, chief executive at FirstMortgage, the London-based telephone lender, explained: "What is happening is that in the wholesale money market, long-term interest rates are going up, both for three and five-year terms. Three-year rates have risen 0.25 percentage points in the past few weeks and five-year rates by 0.5 points.

"This means there will be fewer opportunities for borrowers to switch from variable to fixed rates advantageously.

"The message we are trying to get across is that just because variable rates are coming down, the same is not happening in the long-term market. The best rates are disappearing now." His message is therefore to switch now where possible.

But is it possible to switch mortgages? For several million borrowers, the answer is likely to be no. They are the ones who in the past two or three years opted to take advantage of special deals available from many mortgage lenders.

In nearly all cases, the discounts and fixed rates they chose carry heavy penalties if they want to remortgage elsewhere. This, by the way, is something that also applies to today's special offers. For most, however, the deals they picked up are still quite good, even in today's market, so they are not being penalised particularly heavily for their earlier decisions.

There is another class of borrower in fear of being penalised for switching loans: the 2 million or so who have variable mortgage rates with Halifax, Alliance & Leicester, National & Provincial and Woolwich, all societies planning to de-mutualise.

If they switch, they could lose their right to a shares handout worth up to pounds 1,000 next year. Although they could settle their mortgage account and leave just a few hundred pounds outstanding, other lenders are loath to take a second charge on their properties, because it would leave them in second place in the creditors' queue if a property is repossessed.

The de-mutualising societies believe they control their borrowers by the threat of losing the right to the free shares. If so, they could be in for a shock.

At least one lender, First Mortgage, is seriously investigating the possibility of launching a heavily discounted or fixed rate home loan package where it would be prepared to take a second charge on the property. Such a deal could clear the way for millions of borrowers to take advantage of the best rates available on the market.