Lenders push variable rates

BUILDING societies are offering a flood of incentives to persuade new borrowers to take out variable-rate loans. But customers are determined to lock into fixed-rate loans while interest rates remain low.

Many borrowers regard the quarter-point cut last week as the probable low point in the interest rate cycle.

Some societies have been doing as much as half their new business at fixed rates, and are worried their mortgage books are becoming unbalanced.

The competition to get new loans is so fierce that societies have had to cut their margins - the amount on top of the cost of funds - on fixed-rate business.

Ian Darby, marketing director at the mortgage brokers John Charcol, said money market interest rates on longer- term funds - five years or more - were beginning to drift up. 'It's making the margins on fixed rates at 6.99 per cent pretty tight,' he said.

So societies are turning their marketing energies towards variable-rate loans, and tempting borrowers with huge discounts in the first year from the standard rates of around 7.74 per cent.

The Cheltenham & Gloucester is offering a 3 per cent discount, the Northern Rock 4.24 per cent, and Birmingham Midshires 4.5 per cent for six months.

Borrowers are also being offered straight cash as an inducement to accept a variable rate. The Northern Rock gives customers pounds 1,000 if they forgo the discount.

Once borrowers have a variable rate then at least there is the possibility of widening margins if interest rates rise.

The money markets are not predicting any violent increase in interest rates. Instead, traders believe that they will drift gently higher over the next few years.

Some borrowers think they can take advantage of discounts on variable rates and still have time to switch to a fixed loan at low interest before rates rise much.

Although the discounts only last a year on average, there are penalties for abandoning the loan in the first few years.

Loan rate switch, page 13