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Tuesday, 20 February, 2001, 13:38 GMT
Analysis: Cheaper mortgages for all?

Mortgage payments are the biggest financial burden most people will ever have.

As the money disappears from your account every month, it is easy to forget that this is one transaction in which the consumer can hold the upper hand.

Banks and building societies compete fiercely for new customers, offering cut-price rates to get them to sign up.

For a lot of people, this will mean a lot more money in their pockets

Ian Darby, commercial director, John Charcol

As Halifax and Nationwide announce they are cutting their interest rates, it is becoming clear that lenders realise it is not just enough to offer cut price deals for the first few years of a mortgage - most customers now want a good deal for life.

Signing up for life

Taking out a mortgage is a complex process, involving paper work, legal and financial fees.

Traditionally, once people have signed the dotted line, they are reluctant to restart the process and shop around for a better deal when the benefits of the original deal, for example a low interest rate for two years, expire.

But over the past five years, greater awareness of the bargains to be got on the High Street have gone some way to eroding this apathy.

Remortgaging now accounts for about 30% of the overall mortgage market, says Ian Darby, commercial director at John Charcol.

The increase in remortgaging has led banks and building societies to question the way they do business.

"The traditional formula is that you overcharge existing borrowers in order to subsidise cheaper mortages to attract new business," according to Paula John, editor of Your Mortgage.

Halifax logo
Good news for Halifax customers?
The problem with this model, explains Mr Darby, is the expense of getting new business.

"It is thousands of pounds by the time you pay for administration, costs of transfer, discounts and cashbacks you have given," he added.

On top of this expense, lenders run the risk of alienating existing borrowers - who often pay a higher rate than the new borrowers - who realise that it may make more sense to get a mortgage elsewhere.

"The amount of remortgage business being done in the market has led to a position where there is too big a gap between new and existing customers' rates," Mr Darby added.

Mind the mortgage gap

It has been becoming increasingly clear that the old model doesn't work as well as it used to.

Hence on Monday, the Nationwide building society said that it would drop its standard variable rate from 7.09% to 6.49%.

The Halifax will be gritting its teeth over this

Paula John, Your Mortgage editor

It also said it would scrap discounted mortgages for new lenders.

On Tuesday, Halifax also said that it would offer more favourable terms for existing as well as new lenders.

The Halifax mortgage product, to be launched in March, will be priced at one percentage point above the Bank of England's base rate.

Its rate would therefore stand at 6.75% if UK rates stay unchanged, compared with its existing rate of 7.5%.

Shopping around

Remortgaging will still continue to make sense as many smaller building societies offer more competitive rates than either the Halifax or the Nationwide.

"Mortgage borrowers are notorious for being apathetic... there are cheaper deals available than the variable rate mortgages. More than 50% of mortgages borrowers are on variable rate. If you are on one of those, you should shop around," Your Mortgage's Paula John said.

But there is no doubt, according to John Charcol's Ian Darby that Halifax and Nationwide moves will "for a lot of people, [mean] a lot more money in their pockets".

But it is as yet unclear if other mortage lenders will follow suit.

One expert believes that building societies will come under greater pressure than banks to cut rates, so they can continue to trumpet the benefits of mutuality.

Good news for shares?

While it may be good news for customers, bank shareholders may not be rejoicing.

Halifax is the most widely held shares in the country.

In the immediate aftermath of the Halifax share decision, shares in Halifax fell 22p to 686p.

Shares in Alliance & Leicester, Lloyds, Abbey National all followed suit.

This drop highlights what some observers see as the advantages of taking out your mortgage with a building society.

Banks make money by getting more from their mortgage repayments than they pay to their savers, so cheaper deals for borrowers could be bad news for the bottom line.

"The Nationwide is tangibly demonstrating the benefits of mutuality... the Halifax will be gritting its teeth over this move," said Ms John.

What Halifax will be hoping is that its long term growth rate will be helped by the move.

Halifax did see its profits jump 7%, but its rate of growth was still slower than Abbey National, which saw its profits rise 11%.

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See also:

19 Feb 01 | Business
Nationwide slashes mortgage rate
20 Feb 01 | Business
Halifax stokes mortgage war
09 Feb 01 | Business
Banks profit from rate cut
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