Sabtu, 26 Mei 2012

Mortgage borrowers can make the best of base rate falls

Mortgage borrowers can make the best of base rate falls

By Jo Thornhill

PUBLISHED: 15:43 EST, 26 May 2012 | UPDATED: 15:43 EST, 26 May 2012

Douglas Thrower says his two-year Woolwich tracker mortgage offers a very attractive rate

Good value: Douglas Thrower says his two-year Woolwich tracker mortgage offers a very attractive rate

An interest rate cut could be on the way after Christine Lagarde, head of the International Monetary Fund, last week called on the Bank of England to do more to stop the economy stagnating. There was also shock news that the economy shrank more than was expected in the first quarter.

The IMF has recommended more quantitative easing â€" pumping new money into the economy â€" and a cut in the base rate from 0.5 per cent. Such moves could have big implications  for consumers, especially mortgage borrowers.

Who will benefit from a rate cut?

Anyone with a fixed-rat e mortgage will miss out while in theory those with a tracker or standard variable rate home loan will pay less. But this will depend on the generosity of their lender if they are on the SVR, or the terms of their mortgage deal if they are on a tracker.

I am on a tracker mortgage. Won’t my repayments fall automatically?

Most tracker borrowers are linked to the base rate, so a fall there should mean an equivalent reduction in their mortgage rate.

But for some homeowners on tracker deals there may be a catch. Some lenders apply a ‘floor’ or ‘collar’ on their tracker loans â€" a rate below which the borrower’s pay rate cannot fall.

Yorkshire Building Society has a two-year tracker at 2.59 percentage points above the base rate, but with a collar of 3.09 per cent. This means that if the base rate falls below 0.5 per cent, the rate will not be reduced.

Some trackers, such as those from Woolwich and NatWest, track changes to their own ‘base rate’. These rates are currently the same as the Bank of England’s. But the lenders reserve the right not to change the rate, even when the Bank of England rate is cut, so borrowers could miss out.

I’m paying my lender’s SVR. Will my interest rate come down?

Probably not. Unlike tracker deals that are linked to changes in the base rate, standard variable rate deals are controlled by the lender.

Many, including Halifax, Royal Bank of Scotland and Co-operative Bank, have increased SVRs in recent months, blaming higher funding costs, despite no change to the base rate. Mark Harris, chief executive of mortgage broker SP F Private Clients in central London, says: ‘It is unlikely lenders would reduce their variable rates if interest rates were to fall further. Given that several have raised their variable rates recently, many lenders would simply absorb the benefit of any rate cut rather than pass it on to their borrowers.’

I am about to remortgage.  Should I take a tracker deal?

Base rate trackers are an attractive option if you are remortgaging, whether rates fall further or not.

But David Hollingworth of London Country Mortgages in Bath, Somerset, says borrowers should make a decision based purely on their own financial circumstances.

‘If you are worried about your budget or you feel more comfortable with a fixed-rate loan, then fix. It is possible rates will not fall any lower,’ he says.

For those happy to take a floating rate, trackers are cheaper than fixed rates, but watch out for any collar.

Bank of China ha s a lifetime tracker at 2.3 points above the base rate, with no collar. Borrowers need a 20 per cent deposit and there is a £1,295 fee.

Douglas Thrower, 33, an IT manager from Littlethorpe, Leicestershire, and his partner Jenny Weston, 29, a greetings card designer, have a two-year tracker mortgage with Woolwich, owned by Barclays.

The couple, who have an 18-month-old daughter, Libby, have bought a four-bedroom new-build house in  Rothley, north of Leicester.

Their mortgage rate tracks at 2.99 points above Barclays’ own 0.5 per cent base rate, giving a starting pay rate of 3.49 per cent. There was a  £999 fee and they needed at least  20 per cent equity. Douglas says: ‘This tracker is excellent value and I don’t think that rates are likely to rise much in the next two years.’

... and annuities will get even worse

The threat of more quantitative easing â€" the ‘creation’ of money by the Bank of England â €" is a blow to those approaching retirement who need to convert a pension into an annuity income.

QE hits annuity rates because Government bonds are bought up by the Bank. This creates a lack of supply forcing bond prices up and yields down. These are the bonds that annuities must buy to provide an income, so it means annuity yields â€" or the rate â€" also fall.

Bob Bullivant, chief executive at independent broker Annuity Direct in Ryde, Isle of Wight, says it is crucial to find the best possible annuity deal. ‘A good adviser will ensure you shop around for an annuity,’ he says.

‘You should also discuss any medical issues â€" this could  provide a better annuity rate.

‘Remember, an annuity can be bought only once so it is vital  to make the right choice.’

Bullivant says pensioners should consider alternatives to traditional annuities. One of these is drawdown, where income is taken from the pension f und without buying an annuity.

Another is unitised annuities,  also known as investment-linked annuities, where income depends on investment performance and can rise and fall over time.

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