Homeowners were banking on good news as the Bank of England once again reviewed the base rate. With increased financial pressure on all of us in the run up to Christmas, there were sighs of relief as the rate was left unchanged at 3.75%.
Ray Boulger of independent mortgage advisers Charcol, said: 'Any decision other than no change would have been a major surprise - we do not expect further Base Rate increases for a couple of months yet.' So what should borrowers do now? 'We believe that trackers and discounted deals continue to offer the best value when compared to fixed rate deals,' Boulger explains. 'Those who do not need the security of a fixed monthly payment, should opt for a flexible discount/tracker mortgage and overpay now while rates are still historically low in order to pay off more of their mortgage debt. Alternatively, a number of discounted capped rate deals have come onto the market that provide the perfect quid pro quo to borrowers nervous about future rate rises but not wanting to miss out on lower rates now.'
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So how do discounted and tracker rates work?
Discounted rates are special deals used by lenders to attract borrowers. A discount mortgage offers a reduction - a discount - of a set amount on the lender's standard variable rate (SVR). If the SVR changes, the rate you pay will change too but the level of the discount remains the same. So if the SVR is 5% and your mortgage deal gives you a 0.5% discount then you pay 4.5%. If the SVR increases to 5.5% then you will still pay 0.5% less - but your rate will rise to 5%. The same applies if the SVR falls. Like most special offers, discounted mortgage rates are only available for a limited amount of time. Once the discount period expires, you will be charged the normal SVR. Because of this, it is important to avoid deals which lock you in for a set period after the discount expires. If you are not tied in, you can switch to a more competitive deal.
On the other hand, tracker rate mortgages give you the certainty of knowing the rate you pay will move automatically in line with Bank base rates. You benefit straight away from any reduction in Bank base rate, even if the lender delays reducing its standard variable rate to reflect the reduction. Tracker rates often track Bank base rate by a certain percentage, e.g. Bank base plus 0.75% for the full term of the mortgage.
Ray Boulger's current picks include the following deals:
- Lambeth Building Society's discounted rate of 3.38% for two years
- Abbey's tracker which gives 0.20% off bank base for two years, currently offering 3.55%
- National Counties Building Society discount deal of 3.71% for five years
- Britannia's two year fixed rate of 4.19%
- Charcol Exclusive of 4.24% discount and capped at 5.99% until the end of January 2007.
And what can homeowners expect next from rates?
George Johns, Economist for The Woolwich says: 'Today's decision is one instance where the MPC is happy to wait and see how households react to last months rate increase first, before raising interest rates any higher. But the improvement in the domestic and international economic landscape means the MPC will find it necessary to raise rates further early next year.' He adds: 'As it stands though, the MPC have said that they intend to do this in a gradual manner given the uncertainty of just how households will react to rate hikes against a backdrop of high levels of consumer indebtedness.'
