Will the base interest rate cut mean cheap mortgages?

Getting the right mortgage is going to take ever more diligence on your part - hunting down the right mortgage deal is likely to get tougher. Steven Crawshaw, chairman of the Council of Mortgage Lenders (CML) has warned that net mortgage lending, which the CML had already forecast in October to contract by nearly 16%, could halve this year. In practice that could mean a swift return to the mortgage queues of yesteryear. Already the number of mortgage deals on offer has contracted by two-thirds since last summer.

The Bank of England's base rate now stands at 5% after this months widely expected 0.25% cut by the Monetary Policy Committee (MPC). Concern about inflationary pressure was outweighed by worries about future growth prospects as the 'credit crunch' bites. But the usual headlines welcoming the move for mortgage payers have been missing.

Will you see any benefit from the lower base rate in your monthly mortgage bill? There's a strong chance you won't. There are some 11.8 million mortgages outstanding, worth a collective £2.5 trillion. But it's been estimated that upwards of half of all these mortgages are fixed rate deals of varying durations.

Anyone paying a fixed rate mortgage obviously won't be seeing the benefit of an interest rate cut during the term of their rate fix - that stands to reason. What may be less obvious is the fact that you may not benefit from lower interest rates when your mortgage fix comes to an end.

How much will your mortgage repayments be?

The major lenders were quick to announce that they were passing on the cut in base rates in full on their standard variable rate mortgage costs (in Nationwide's case on its base mortgage rate - BMR) However, you won't find a reduction in your April mortgage payment as the SVR cuts don't take effect until 1 May 2008. Halifax, the UK's biggest mortgage lender reduced its SVR to 7% - which is exactly where it was in January of last year when base rate was last at 5%.

It may be churlish to point out but when base rate was previously at 5% before the increase to that level in November 2006 (in August 2001), Halifax's SVR stood at 6%. You don't need to be a maths' genius to realise that the bank has doubled the margin on its SVR over base rate.

Halifax is, of course, not alone in increasing its margin in this way over the first half of the first decade of the 21st Century. In fact, 7% is pretty much the average SVR now available - honourable mentions to First Direct at 6% and Nationwide at 6.49% - although you might struggle actually to get a loan at these rates without a huge deposit.

Following the Bank of England's base rate cut on 10 April 2008, Nationwide was the first major lender to announce a reduction in what the society calls its BMR. Oddly enough, Nationwide had also been the last major lender to increase the interest rates on some of its mortgages - barely an hour before the MPC's decision was announced!

In fact, both Nationwide and Alliance & Leicester raised mortgage rates on the morning of the MPC's announcement. The rates increased were their ranges of fixed rate mortgage products. These lending institutions are not, contrary to much gossip, staffed by idiots. Along with the rest of us they will have had a pretty clear idea that base rate was coming down... and yet they put the rates potential mortgage borrowers were likely to focus on up! It was the second increase in fixed mortgage rate costs by Alliance & Leicester in three days and the second in a fortnight for Nationwide.

Find the best buy fixed rate remortgages.

And it's not just fixed rates that are more expensive now. Tracker mortgages - which directly reflect changes in base rate - are also more expensive. For example, at time of writing Barclays' most competitive tracker rate is 0.74% over base rate (for those looking for 60% loan-to-value or less). Less than three years ago, the bank was offering (albeit briefly) a tracker as low as 0.17% over base!

The loan-to-value (LTV) figure is also significant. Those looking to remortgage and those looking for a new mortgage will find a much sharper distinction between the interest rates available to them, depending on the LTV they are seeking. For new borrowers this means a much more substantial deposit is required to achieve the mortgage rate they want. Those remortgaging will have to pay much closer attention to the equity in their property - especially in light of clear indications that property values are now falling month-on-month.

Find the best buy variable interest rate remortgages.

You'll also need to consider the fees you are likely to pay for any mortgage 'special'. Most people will be aware that mortgage fees now are substantially higher than they were five years ago. Mortgages that would then have attracted fees of between £200-400 now routinely cost more than double that amount to arrange.

HSBC's Mortgage Match offer for five weeks from 14 April 2008 claims to match fixed rate deals ending now but with a lower limit of 4.54% and a minimum LTV of 80% or less. That might sound a good deal to anyone attempting to avoid a mortgage shock. However, the offer applies only on loans of £250,000 or less, and fees range from £999 to £4,999, making a substantial dent in any saving you may be making.

Your home may be repossessed if you do not keep up repayments on your mortgage.

25 April 2008 © Moneyextra.com

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