'Five million borrowers are paying more than they need'

Although the mortgage market may be twitchy on election eve, there are still easy savings to be made by shopping around, writes Clifford German

Eddie George may be fretting openly about the need to raise interest rates, but there is still a wide range of special offers around, including fixed rates for up to 10 years, and a variety of discounts and cashbacks for new borrowers and existing borrowers looking to switch lenders. According to independent advisers Berkeley Financial Planning, five million borrowers are still paying more than they need. Most simply do not realise the opportunities or advantages open to virtually all new borrowers and existing borrowers not trapped by negative equity.

Independent mortgage adviser John Charcol has just come out with a fixed rate of 6.99 per cent guaranteed for five years on up to 90 per cent of the property valuation. Even allowing for a hefty completion fee of pounds 700 - which can be added to the loan but will discourage some small borrowers - John Charcol's offer will undercut the previous market leader, Northern Rock, which charges 7.49 per cent and a pounds 295 arrangement fee.

John Charcol's penalty for redeeming the loan within six years is also slightly less Draconian, at six months' interest compared with Northern Rock's 5 per cent penalty, for borrowers who want out of the deal over the same timescale.

Brokers London & Country have also teamed up with National Counties Building Society to launch an Election Choice mortgage, which combines a 3 per cent discount on the standard variable rate (which is currently 6.99 per cent) for the next nine months with the option at that time to take a further discount of 1 per cent below the standard variable rate for the following four years if the interest rate outlook still seems set fair, or to lock into a fixed rate of 7.99 per cent guaranteed until January 2002. The maximum advance is 70 per cent of the property valuation, there is a pounds 295 completion fee and a six-month interest rate penalty for early redemption, although the loan is portable.

As variable mortgage rates approach the low point of the cycle, and the discounts on variable rates start to shrink, the relative attractions of fixed-rate mortgages compared with variable rates are beginning to increase again.

The general view is that the downward trend in variable rates must have gone almost as far as it can in this stage of the economic cycle, even if the Chancellor does try to squeeze one more quarter-point drop in base rates next month to make up for a dearth of tax cuts. Interest rates in the United States are also poised to rise once the Presidential election is out of the way, with inevitable knock-on effects in the UK.

For borrowers who do still think that discounts upfront are worth more than a fixed rate, Leeds & Holbeck is offering mortgages with discounts of 1.25 per cent for the next three years off its standard variable rate, which is currently 6.99 per cent. Valuation fees will also be refunded if the loan is completed before the end of the year but the discount will be reclaimed in full if the mortgage is paid off within the first four years.

It is anyone's guess what the effect of the next UK election will be on interest rates, but it is a fact that interest rates went up after the 1979, 1983 and 1987 elections, and they only came down after the 1992 election because the pound fell out of the ERM.

A new survey by Merrill Lynch shows 89 per cent of fund managers expect base rates will be higher this time next year and past evidence suggests that rates will rise for two to three years when they do start to move.

The European single currency is also beginning to cast a shadow over interest rates, and one which will not please the Eurosceptics. Whatever you think about the principle of a European single currency it is generally accepted that UK rates will have to be higher outside the currency union than they would be inside, and the chances of the UK making a serious attempt to get inside seems to get dimmer by the day, regardless of who wins the general election.

The yield on Spanish government stock maturing in 10 years' time dipped below the equivalent UK government stock this week, not because the Spanish economy is in better shape than the UK economy, which it is not, but simply because the money markets think Spain is making a genuine effort to qualify for a single currency, while the UK is not.

As John Anderson, head of the fixed interest department at pension specialists National Provident Institution (NPI) points out, yields on all European government stocks have been coming down, but while UK and German rates have been creeping, other countries racing to qualify for the single currency have been romping down, narrowing the gap between the highest and lowest rates and incidentally creating a vicious circle by reducing the interest rate burden on their economies.

Borrowers wanting details can call John Charcol on 0800-718191, London & Country Mortgages on 0800-373300, and Berkeley Financial Planning on 01203-555240.