Rate cut provides respite for some

HOMEOWNERS will this weekend be celebrating lower monthly mortgage bills after an interest rate cut which could put up to £500 back in many of their pockets over the coming year.

But their problems are far from over. House prices continue to tumble, and despite the reduction, banks remain unwilling to lend.

So acute is the crisis in the property world that the Treasury Select Committee will on Tuesday convene a special meeting to investigate what has gone wrong and what are the prospects for recovery.

This follows last week's concerted global move to cut the cost of borrowing when the Bank of England's Monetary Policy Committee voted to slash the base rate by 0.5% to 4.5% on the same day the Bank of Canada, the European Central Bank, the Federal Reserve, Sveriges Riksbank and the Swiss National Bank also announced interest rate reductions.

The reduction from 5% to 4.5% is the first cut the UK has seen since April and has been welcomed by industry experts.

Adrian Coles, director general of the Buildings Societies Association, says: "The outlook for the economy has deteriorated considerably in recent months, activity in the housing market has stalled and house prices have fallen."

Across the UK, house prices have fallen at a record rate of more than 13% during the year to the end of September, according to the latest Halifax house price index. The recent price falls have reduced the average price of a home to £172,108, almost back to the level it was in January 2006, and more than £26,000 less than in September last year.

Immediately after the Bank of England announcement, Halifax and Bank of Scotland, Lloyds TSB, Woolwich (the mortgage arm of Barclays), Cheltenham & Gloucester, NatWest and the Royal Bank of Scotland announced that they will pass on the full rate cut to homeowners who are on their standard variable rates (SVR). The new rates will come into force on November 1.

This is good news for borrowers with a mortgage deal that tracks the base rate or who pay their lender's SVR rate. For example, Halifax customers on the bank's SVR will see the rate they pay drop from 7% to 6.5%. Someone with a £100,000 repayment mortgage over 25 years will see their monthly payments reduce from £706.78 to £675.21, a saving of £31.57 a month or £378.84 a year. Those on interest-only mortgages gain more.

Similarly, those on tracker deals will enjoy a 0.5% reduction in what they pay.

Borrowers on fixed deals will not benefit until their mortgage comes to an end, but the signs are that there could be some attractive fixes around in the months ahead. Swap rates, which are used by lenders to price fixed rate mortgages, have dropped by 0.2% since the announcement. Furthermore, the Bank of England base rate is expected to fall by up to another 1% by the second half of next year, signalling even better deals to come.

However, it was far from all good news, as the rate which some borrowers must pay to get into the market will have actually gone up, as banks have used the rate cut to disguise a price increase.

The Woolwich, for example, has increased the margin which it charges above base on most of its tracker deals for new borrowers by between 0.1% and 0.4%, while simultaneously requiring bigger deposits.

For example, its tracker requiring a 15% deposit was charging 1.29% above base rate. Borrowers on this deal were paying 6.29% and will now pay 5.79%. This has increased so that new borrowers will be required to pay 1.69% over base rate, pushing the current pay rate to 6.19%. And to qualify for that loan they must now put up 80% of the value of the property.

Lloyds TSB quickly withdrew its competitive tracker deals linked to the base rate offered under its C&G wing. The move was especially a blow to first-timers with a small deposit, as the trackers concerned only required buyers to put down 10% of the purchase price.

Good tracker rates around at the moment include Nationwide's remortgage deal tracking at 0.53% over base rate for two years for a £1,999 fee with free valuation and legals. It now has a far more affordable pay rate of 5.03%, instead of 5.53% previously.

Alternatively, HSBC has a lifetime tracker deal at bank rate plus 0.94%, giving a pay rate of 5.44%. It comes with a £499 fee and is available at up to 90% loan to value.

For borrowers that like or need the security that comes with a fixed rate, best buys at the moment include Cheltenham & Gloucester's two-year fix at 4.99% with a £3,750 arrangement fee, and Abbey's two-year fix at 5.54% with a £1,499 fee.