Whether it's mortgage rates, personal loans or credit cards at 0%, lenders are queuing up to offer cut-price deals

So much for austerity Britain. Mortgage rates are falling, personal loans are now the cheapest they have ever been in the UK, and credit card providers are falling over themselves to offer 0% terms. Indeed, cheaper credit cards and personal loans enticed consumers to borrow an extra £1.2bn in September 2012 alone, the sharpest monthly rise in consumer credit since February 2008. What's going on?


In recent weeks lenders have been scrambling to offer cheap deals to borrowers with large deposits. Deals such as Tesco Bank's 1.99% two-year fix at 60% loan-to-value (LTV) and HSBC's 2.44% two-year fix at 60% LTV, are just a couple of the low rates on offer.

Experts say the fixed-rate mortgage war is a result of the Treasury's Funding For Lending scheme (FLS), which aims to help banks make loans to families and businesses cheaper and more easily available. It has also become cheaper for providers to borrow money on the wholesale markets, with the three-month Libor rate almost halving from 0.58% in January 2012 to 0.31%.

Co-operative Bank's early-November announcement of a market-leading rate for those with a 10% deposit (a two-year fix at 3.99% with no arrangement or valuation fees) indicates that FLS and the improved conditions for banks are finally filtering down to first-time buyers. James Hillon, head of mortgages at Co-op Bank, said: "We believe that boosting the housing market and the wider economy will only be achieved by increasing the availability of mortgages to first-time buyers rather than just focusing on remortgage customers."

Which? executive director Richard Lloyd is calling for Co-op's rivals to follow suit: "We want to see more banks pass on lower borrowing costs to all borrowers, not just those with bigger deposits or equity in their homes."

David Hollingworth of broker London & Country believes "lenders trying to grow their mortgage books through remortgaging are seeing increasing competition, so they will have to look at the higher LTV market".

But Ray Boulger of broker John Charcol said that while it is clear the FLS "has had a major impact in pushing interest rates down to new lows ... it is unlikely to have much impact on the volume of mortgage lending at higher LTVs".

Other competitive first-time buyer loans include First Direct's three-year fix at 4.89% for people with a 10% deposit, Co-op Bank's five-year fix at 3.99% for people with a 15% deposit, and Nottingham building society's five-year fix at 4.74% for people with a 10% deposit (plus a £299 fee).

Personal loans

M&S Bank has slashed the rate on its personal loans by 0.3 percentage points to offer the lowest-ever interest rate on a personal loan in the UK – just 5.5% APR on loans of between £7,500 and £15,000. Experts don't just expect others to follow suit, they believe headline rates will fall to as low as 5% APR in the near future.

M&S is only delivering what the public wants. The Bank of England said there was net growth of £893m in loans and advances during September 2012 (net meaning the figure once repayments have been taken into account), the highest figure since February 2008 and a huge swing from the net repayment of £163m in August.

Howard Archer, chief economist with IHS Global Insight, said that the availability of cheap loans could be because some providers are more confident about the general state of the economy and believe it is now less risky to lend to consumers, while many consumers will themselves be feeling more confident after months of paying off debt.

"Because some consumers will be feeling in a better position as wage growth has picked up a little, they'll be feeling more comfortable about borrowing," Archer said. He also said people may have been "splashing out" on Olympics and Paralympics tickets and visits.

As always, the best deals are reserved for those with well-paid jobs and clean financial records, but if you don't fit into that category it is becoming easier to get a loan. An M&S Bank spokesman said its acceptance rate was high and "the majority" of applicants would get the lowest rate. He added: "To advertise the rate at least 51% of people need to be able to access it. In fact our acceptance rate for the advertised rate on our personal loans is far higher than this."

Credit cards

Borrowers are taking advantage of a mushrooming 0% credit card market that's suddenly enjoying something of a price war in terms of transfer fees, perks and "go-to" rates of interest. The lower-cost cards can be divided into two areas – a long 0% term with higher balance transfer fee, or a shorter interest-free term with a much lower transfer fee – in some cases just 1%.

Barclaycard is offering a low-fee credit card, with a 0% term for 12 months and a balance transfer fee of 0.9%. NatWest has probably the best shorter-term deal – 0% for 13 months on transfers, and six months on purchases – with a balance transfer fee of just 1%. Moving a £5,000 balance on an existing card would incur a transfer fee of £50, but no interest if you pay it off after 12 months or before.

If you want to park a credit card balance for the longest period possible, the Barclaycard Platinum card is offering 0% interest for 23 months on balance transfers (with a higher 2.8% transfer fee), and 0% on purchases made in the first three months.


What banks give with one hand, they take with the other: the low interest rate environment continues to punish savers, and rates are being withdrawn or reduced by many of the leading savings providers almost on a daily basis.

Guilty parties include Santander (which replaced its eSaver Issue 8, paying 2.50%, with Issue 9 paying just 1.5%) and NatWest (which removed the 1.81% bonus on its eSavings easy access account). Perhaps the most disappointing reduction came from National Savings & Investments, which cut the rate on its Direct Isa for both new and existing customers by 0.25 percentage points to 2.25%.

The situation is worse when you factor in the effects of inflation and income tax. While the consumer price index has fallen to 2.2%, savings rates have also fallen from their peak. The current best-buy easy-access accounts now pay just 2.5% – down 0.75 percentage points since June 2012.

Basic rate taxpayers need to earn 2.75% from their bank account to match inflation and higher-rate taxpayers need to earn 3.66% on their savings. At the time of writing there is no easy access account which will keep up with inflation and there are only 12 notice accounts.

Anna Bowes of SavingsChampion.co.uk says: "The real concern is when this will end as providers continue the race to the bottom of the best buys tables."

For those who don't want an account with a bonus, the best is from Saffron building society, paying 2.5% gross/AER.

Mark King

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source: http://www.guardian.co.uk/money/2012/nov/11/mortgages-personal-loans-credit-cards-interest-rates


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