What's next for mortgage borrowers?

The Bank of England’s base rate has dropped to an all time low of 1.5%, so what does this mean for mortgage borrowers and savers?

The Motley Fool, the online financial services communicator, has revealed savers are struggling to make the most of their money. However, many borrowers’ monthly payments have dropped considerably and could still drop further. For example, those with a variable or tracker rate mortgage with Lloyd’s TSB or C&G have seen a drop of 3.5% since interest rates started to fall, resulting in an average saving of £200 a month.

Some lenders are suggesting switching to a fixed rate mortgage as rates are not expected to drop much further. However, others are saying it’s not a good time to switch as trackers are currently better value. So what should be done? Experts have recommended choosing a tracker rate mortgage from a lender with a drop lock option-where the borrower can switch to the lenders fixed rate mortgage at any time without extra cost. Trackers with a drop lock option are available from Nationwide and C&G.

A problem faced by first time buyers is that there are limited tracker mortgages available at the moment and many are requiring a large deposit, some up to 40%. The average deposit is said to be the largest for 35 years. There are now said to be just 21 mortgages available with a deposit of 5% or less compared to 1200 in February 08. So borrowers with enough for a 20% deposit have to opt for fixed or standard variable rate mortgages; however, experts are hoping that fixed rates might drop over the next few weeks. The number of new loans granted in November last year was just 33,000, 17% less than October and 59% down from November 2007. Experts predict this could drop further still over the next few months as a result of limited mortgage funding and reduced customer demand.

 Mortgage rates are dropping

Despite drops in mortgage rates, due to the loss of jobs and incomes, some homeowners are struggling with repayments see our article on ‘Homeowners and the strain of monthly payments’ for guidance.