With the bank base rate remaining at the same level for most of the year, you would be forgiven for thinking not much has changed for mortgage customers in 2002. But nothing could be further from the truth.
Research published in September by the Council of Mortgage Lenders confirmed what most of us already knew: that the UK borrower enjoys the most competitive and innovative mortgage market in Europe; and one could justifiably extend that claim to the whole world.
Competition among lenders and a favourable economic climate for borrowers has been a major factor in putting extra spending power in the pockets of most UK homeowners, with two areas worthy of comment ‘ innovation and the recent frantic activity in the fixed rate market.
Mortgage innovation is an ongoing developing dynamic in the UK. Offset and other flexible mortgages have now truly established themselves in the market. Offset is clearly winning its battle with current account mortgages for dominance in that sector of the market. Although there is room for both, I expect the number of lenders offering offset mortgages to increase significantly over the next few years. The drop-lock concept, where borrowers on a discounted or tracker rate have a guarantee they can switch into a fixed rate at any time, has also seen further developments. With some, such as Yorkshire Building Society, guaranteeing the fixed rate which borrowers can lock into for the whole two years of their deal.
Fixed rates have also staged something of a comeback and in just under three months, it has seen the best rates for periods up to five years slide down by up to 1% for most of 2002. The differential between the best of the discounts and the best of the fixes in the two-year category has been around 1%, but this has now reduced to around 0.25%. The sharp fall in the cost of fixed mortgages means today’s borrowers have access to the lowest fixed rates in living memory.
While it is impossible to predict what will happen in the mortgage market in the future, all the indications are that the bank base rate will hover near the current level for some time, possibly until the end of 2003.
This offers an extended window of opportunity for borrowers with mortgages which allow penalty free overpayments, particularly those with offset, current account or flexible mortgages, to take advantage of current low interest rates by overpaying. This is particularly relevant for those with a flexible mortgage as overpayments can be accessed, either by taking a payment holiday or drawdown, should the need arise in the future.
Ray Boulger is senior technical manager of Charcol