Good news as fixed-rate mortgages get back on track

Homeowners look set to welcome the news that some of the UK's big-name lenders, including Abbey, NatWest and Alliance & Leicester, have reduced the price of their fixed-rate mortgage deals.

Friday saw the NatWest/Royal Bank of Scotland launch the cheapest two-year, fixed-rate mortgage deal on the market, with a fee of £799, and an interest rate of 3.49% for new buyers, or 3.79% for those looking to remortgage their property. The 40% deposit which was previously required for this mortgage has now been replaced with a deposit of 25%.

Richard Morea of mortgage brokers London & Country said: "It is pleasing that the part-nationalised Royal Bank of Scotland has already responded to the government calls to improve lending, while Northern Rock has said it is going to encourage existing borrowers to stay with it, presumably by offering cheaper deals."

The best fixed-rate options for households with a 90% loan-to-value (LTV) mortgage are currently with Cheltenham & Gloucester, which is offering an interest rate of 5.69% with a £1,094 fee; and the Yorkshire Bank, which is offering borrowers a two-year, fixed-rate deal at 5.99%, with a £599 fee.

It has been reported that many homeowners are deciding to stay on their bank or building society's standard variable rate (SVR) when their deal reaches an end, rather than remortgaging.

While this can be turn out to be cheaper when it comes to fees and rates, Mr. Morea warns that there is a risk involved: "If you do decide to do this, remember that the price of your house is likely to be eroded further, increasing your LTV. A higher LTV might mean you can't remortgage off the SVR later should you want to."

Another option for those looking for the best mortgage deal could be a longer-term deal in the form of a five-year, or ten-year fixed rate mortgage. However, although a longer-term fixed rate mortgage may offer peace of mind, Melanie Bien of mortgage brokers Savills Private Finance warns borrowers that they may be required to pay large early repayment charges to leave the mortgage when the term draws to a close.

"Many borrowers prefer the flexibility of shorter fixes, in case they move or if their circumstances change - plus rates tend to be lower," she says.

Ray Boulger of mortgage brokers John Charcol believes that tracker mortgages continue to be the most attractive type of mortgage available. He explains that although the price of fixed-rate products have been falling, they still look expensive.

"As there's scope for fixes to fall further, you don't want to lock in too soon," he adds.

Mr. Boulger suggests that borrowers look at those tracker mortgages which come with a "drop-lock" option. Such deals, which are available from lenders including Cheltenham & Gloucester and Woolwich, allow borrowers who are on tracker mortgages, to swap to a fixed-rate deal at any point throughout the duration of the deal, without incurring any penalty charges.

When it comes to tracker mortgages in general, Mr. Boulger warns borrowers to be aware of collars which some banks and building societies impose to prevent the mortgage rate dropping below a certain level.

For borrowers who don't mind the peaks and troughs of a tracker mortgage, Mr. Boulger highlights what he calls a "great deal" from First Direct which has a fee of £799 – up to 80% LTV, and a rate of 1.89% over base for the lifetime of the mortgage.

Source: The Observer | Last updated: 25th January 2009

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