Why lower base rates won’t help you
By Chris Gilchrist     25th March 2008

The Bank of England has cut half a percent off its base rate since last autumn, but the best tracker mortgage now costs more than it did then.

Another quarter-percent cut in base rate is likely soon, but probably won’t feed through to borrowers. Last October, when base rate was 5.75%, you could get a two-year discount tracker mortgage at 5.4%.

Today, with base rate at 5.25%, the best two-year tracker mortgage deal is at 5.5%. In relative terms, the tracker loan is now 0.6% more expensive than it was six months ago - an extra £900 a year on a £150,000 mortgage.

How the banks are squeezing borrowers

• No more 100% mortgages
• Lower earnings multiples of 3.5 to four times the prime earner’s income
• The best mortgage deals available only on under 75% Loan-to-Value
• Higher arrangement fees of up to £2,000 for the best-rate loans
• Higher interest rates for self-certification loans
• Higher margins between base rate and the amount borrowers pay


As you can see, the last item is just one aspect of the great mortgage squeeze. But it’s the one that’s likely to cause existing borrowers most pain.

After all, most of us didn’t lie about our earnings to get a loan and we borrowed under 75% of the value of our home and less than five times our earnings. So we’re still good credit risks as far as the banks are concerned.

They want your money big-time
But that won’t stop the banks from trying to charge us more. Because in the two years up to last summer, their ‘lending margin’ - the profit they earned above what it cost them to borrow the money they lent us - shrank from its traditional 1.5% to almost nothing.

Now the mortgage lenders are keen to grab it back. And they have the support of their regulator, the Financial Services Authority, which has warned banks that they must charge a premium for riskier lending - which is a bit like giving a highwayman a faster horse and the freedom of the county.

The big reduction in the number of loans on offer from Northern Rock and other ‘secondary’ lenders means that the biggest traditional high street lenders - Lloyds, Natwest, Barclays and HSBC plus Halifax and Nationwide - are now regaining market share they lost during the boom.

Borrowing costs you more now
But the big lenders are keen to regain lending business on their own terms, as Nationwide signalled recently when it said that only people borrowing under 75% of a property’s value would be eligible for its best deals.

Every week sees similar though smaller changes to lending criteria and interest rates. Though some good deals are still available for re-mortgages, most come with big arrangement fees.

Lenders are hoping that hundreds of thousands of people who got preferential introductory deals two years ago will have to stay with them and pay their Standard Variable Rate (typically now 7%) or close to it.

If your mortgage is due for renegotiation soon, how can you avoid paying over the odds? Use the same tactics I recommended recently to sub-prime borrowers.

The key is to start early - assume it will take between two and three months to secure a new mortgage deal and plan accordingly. That at least will give you a fighting chance of avoiding a whacking great increase in your repayments.

Article produced by EveryInvestor.co.uk