New Labour, new mortgage?

As interest rates rise yet again

In the end, the only thing the markets were wrong about was the timing. Predictions of a bank base rate rise shortly after the election - irrespective of which party won - had been rife for months. Gordon Brown surprised many observers, however, with his decision to bring forward the increase by 24 hours.

The Chancellor's move provoked the inevitable scramble by lenders to follow suit with their home loan rates, by an average of 0.35 per cent. Halifax, TSB, Cheltenham & Gloucester, Abbey National and Coventry Building Society were among several hiking the cost of mortgages by about pounds 13 a month for a typical interest-only variable rate loan of pounds 50,000.

Significantly, not all lenders have rushed to raise the cost of a mortgage. Nationwide, Bradford & Bingley, Yorkshire and Britannia - all of them strong proponents of mutuality - are among those refusing to follow the herd. Even when they do, the rise will almost certainly not be on the same scale as the others, further deepening the divide between themselves and the newly-floated banks.

The continuing rivalry between banks and building societies should mean the drive towards higher rates expected by most experts may not be as frenzied as it might have been. The signs are already there: the Coventry, for example, was at pains to point out this week that its new 7.6 per cent rate would still leave up to half its borrowers on a lower "loyalty" rate.

For existing and would-be borrowers, the key questions are whether this week's announcement is the first of many and if it is, what to do.

Experts are united in the belief that mortgage rates are on the way back up, with 8.5 per cent at the upper end of current predictions. So, if rates are on an upward curve, what should potential new borrowers do?

Nick Deutsch, chief executive at First Mortgage, a telephone-based home loan broker and main lender, says demand has meant that in many cases, lenders are running out of fixed-term money within 24 hours of launching a new mortgage.

"We are being contacted by people who know that we can process and accept their applications for fixed loans even faster than the lenders can themselves," he says.

The search for that elusive rate-beating deal has, however, taken a new turn. For if, as many economists suggest, the Chancellor's move to allow the Bank of England to set its own interest rates leads to greater stability in the longer term, long-term mortgage rates will be coming down over the next two or three years.

The prospect opens up for the first time, in the UK at least, the possibility of long-term fixed rates actually lower than prevailing standard variable rates. If so, fixing at today's rates is not as sensible as it initially sounds.

Ian Darby, director at John Charcol, the UK's largest mortgage broker, says: "Those who believe rates are likely to come back down again should protect themselves in the immediate period and have the kind of product that will then be placed to follow them later."

John Charcol is offering a choice of products, including a "capped" mortgage, with a standard variable rate of 7.39 per cent which is guaranteed not to rise above 7.99 per cent between now and June 2002. Alternatively, there is the option of a "fix and cap", beginning with a rate of 6.99 per cent until April 1999. Thereafter the loan reverts to the prevailing standard variable rate, capped at 7.99 per cent until April 2002.

Mr Darby says: "With these loans, you get the advantage of knowing that the cost of your loan will fall if rates do, but will not rise above an acceptable level for the duration of the initial period. Of course, one could put an equally persuasive case for discounted mortgages."

Discounts are the name of the game at Mortgage Intelligence, a network of some 400 brokers throughout the country. Sally Laker, the network's general manager, says: "Up to now, people have argued in favour of fixed rates.

"But we think it may be time for people to consider discounts. This way, you get the attraction of an immediate saving on the prevailing mortgage rate. If rates do go back down, so will the discounted mortgage."

Mortgage Intelligence has negotiated a 1.5 per cent discount on the existing variable rate for five years. Borrowers also receive a pounds 300 cashback to cover legal fee and valuation costs. The valuation fee itself is fixed at pounds 1 for every pounds 1,000 plus VAT of the loan. Ms Laker claims the discount could save a borrower with an pounds 80,000 loan about pounds 100 a month for five years.

And what of existing borrowers? Those who are already locked into fixed rates should already have loans which compete reasonably well with today's prices. For them, it makes little sense in switching, particularly given existing redemption penalties.

Anyone with a variable rate, or a fixed rate about to end soon should seriously consider capping or discounting. Savings over two or three years will easily compensate for the hassle and expense of re-mortgaging - but only if redemption penalties are low or non-existent.

Mortgage Intelligence 0800246000; John Charcol 0800718191