THE Bank of England delivered more pain for homebuyers when it declined to lower borrowing costs last week, triggering a new wave of mortgage screw-tightening by lenders.
The Woolwich and Alliance & Leicester have effectively pulled out of the first-time buyer market, only agreeing loans to borrowers with a deposit of at least 10%. This follows similar moves by the Co-op and Cheltenham and Gloucester, as well as N
ationwide, which has imposed the same minimum deposit on all but two of its mortgage deals.
Elsewhere rates are rising. A&L pushed up its two-year tracker deal as did HSBC on tracker remortgages and some of their fixed deals. Norwich & Peterborough, Bristol & West and Giraffe Money all joined in the general hike of borrowing costs.
Even the best fixed deals now have an APR of around 2% above base rate once fees are included, with the less competitive priced considerably higher.
However, the Bank has signalled that rates may yet fall and as early as next month. Indeed, many commentators now expect at least two, and possibly three or even four further 0.25% point reductions, which could push underlying borrowing costs as low as 4% or 4.25%.
If you believe rates will fall sharply, and want to cash in then trackers and discounted deals will look more attractive, holding out the prospect of tumbling monthly bills as rates fall.
In fact the discounted deals are currently looking cheapest, but a word of warning – these are linked to the lender's own standard variable rate, which gives the bank room to manipulate your rate. If it chooses not to reduce its SVR at one of the rate cuts, there is nothing borrowers can do.
The safest way to ensure you benefit from falls in base rate is via a tracker loan which is directly linked to the Bank of England rate. If you have a 25% deposit, Nationwide is currently lending at 5.74%, with a £599 fee which costs £15,583 over two years, not allowing for any further falls in interest.
If you need a larger advance, Cheltenham & Gloucester has a five-year tracker for those with a 10% deposit currently charging 6.19%. Over the first two years this would cost £16,242 if base rates stayed the same, but less obviously if they fall as is generally anticipated.
If you prefer the security of a fixed deal the Skipton will peg your interest for two years at 5.79% with a 5% deposit. There is a £799 fee, but over two years the total cost will be £15,955 for a £100,000 borrower. This is slightly more than the discounted deals, and with no hope of benefiting from rate falls.
Alternatively, HSBC's three-year fix at 5.77% gives costs over two years of £15,626 but you will need a 10% deposit, as you will for the Halifax's five-year 5.69%.
The full article contains 500 words and appears in Scotland On Sunday newspaper.
