While life may be tough for investors, borrowers have never had it so good and that theme seems set to continue.
The dilemma facing most borrowers is whether they should opt for a variable or fixed rate.
With predictions of a rate cut increasing in number, dis-counted variable rates appear ever more attractive but the prospect of a rate cut and the current stability in the market, mean fixed rates have dropped to some of the lowest levels for 40 years. So with best-buy short-term discounts and fixes both available below 4% borrowers have a hard call to make.
Whether a borrower plumps for a fix or not should be based on their attitude and whether they would prefer the peace of mind. If they are going for the variable rates which are currently cheaper, then there is another choice to consider ‘ tracker or discount.
Tracker mortgages are now available at tantalisingly low rates and carry the certainty that when base rate moves, the pay rate change will be immediate and guaranteed to be of the same magnitude.
In contrast, discounted variable rates are dependent on when and by how much the lender cuts its standard variable rate. It is easy to see the reason some borrowers may not trust traditional discounted rates because some lenders, historically, have not passed on the full extent of base rate reductions and have also delayed the impact of the changes, sometimes by several months. The same lenders are quick of course to put rates up when the base rate bumps back up.
Following the 2% cut to the base rate last year, there is now wide variation in the standard variable rates (SVR) charged by the major lenders. For example, Abbey National has an SVR of 6.1% while Nationwide’s is 4.74%. Abbey has failed to pass on 0.36% of last year’s base rate cuts, a fact unlikely to please many of their borrowers. Unfortunately, it is not the only lender who has put the brakes on cutting its SVRs.
Trackers tended to be longer-term products, tracking at a margin above Bank of England base rate for the life of the loan, but now there is also a good choice of short-term trackers pegged below Bank of England base rate.
The best two-year tracker rate is currently lower then the best buy discount. Couple this with the certainty that it will reduce by the full 0.25% in the event of a further base reduction and it looks all the more attractive. You cannot say the same will be true for discounted rates. If I were a betting man, I would not put a month’s salary on it ‘ so borrowers probable should not put their mortgage on it.
David Hollingworth is mortgage specialist at London and Country
