Borrowers on ultra-low tracker mortgages are being urged to stop overpaying and instead take advantage of some of the top savings deals.

Tracker deals have tumbled with Bank rate, which has fallen from 5.75% in November 2007 to an historic low of 0.5%. Last week the interest rate was held at that level for the fourth consecutive month.

A borrower who took out a Woolwich lifetime tracker in November 2007, which tracks at 0.17 percentage points above Bank rate, has seen their rate fall from 5.92% to just 0.67%. Monthly payments on a £200,000 interest-only deal would have fallen from £987 to just £112. Many borrowers in this position have decided to overpay on their mortgages.

The Council of Mortgage Lenders has estimated that the increase in repayments due to lower interest rates is around £400m a month.

However, while 80% of people overpaying still believe they are better off, according to a recent survey by the Co-operative Bank, some may in fact benefit more by investing the money instead as savings rates hit the 5% mark.

Barnsley building society now offers a five-year bond paying 5.1%, while you can also get a top two-year deal paying 4.5% from Newcastle building society. The best easy-access deals are now paying over 3%.

Using the above mortgage example, if you continued paying £987 a month for the next 12 months, you would have overpaid by £10,500, assuming Bank rate stays the same.

This would save only £32 in interest, according to calculations from L&C Mortgages, a broker.

However, you could place the extra £875 per month (the amount left after paying £112 for the mortgage) into an instant access account such as Birmingham Midshires’ 3.15% deal, for 12 months.

You would have £10,608 as a higher-rate taxpayer at the end of the year. This is £108 in interest — £76 more than overpaying the mortgage.

You could have made even more had you desposited all your mortgage savings since November 2007. Over that period, you would have saved a total of £7,300.

If you placed this into the Newcastle building society’s two-year fixed-rate bond paying 4.5%, a higher rate taxpayer would make £400 in interest over the two years.

If, instead, you decided to use the £7,300 to reduce your mortgage, you would save £98 in interest over the next two years, again assuming Bank rate stayed where it is over the period. You would therefore be £302 worse off.

However, the saving option only makes sense if you are on an ultra-low tracker rate. If you are looking to lock into a tracker today, you would be better off overpaying on the mortgage as the rates are worse for new customers.

The best tracker deal currently available is with HSBC, which tracks at Bank rate plus 2.24 points.

Your monthly repayments, on a £200,000 interest-only deal, would be £457. If we assume you could afford to pay £987 a month, as in our original example, you could overpay by £530 a month.

Over 12 months, your overpayments would be £6,360, but your mortgage balance would reduce by £6,440, according to L&C, saving you £80 in interest.

As a rule of thumb, you can work out if you would be better off overpaying than saving by finding the best savings deal and comparing that with the rate you are paying on your mortgage. If the mortgage rate is lower, you would be better off saving the money.

Remember to net the rate on the savings deal to work out how much you are actually making. For example, if your savings rate is 5%, as a higher-rate taxpayer, you would be paid 3% after tax.

Paragon’s Trends research, a panel-based survey of experienced landlords, showed that average yields rose to 6.4% in the second quarter of 2009, up from 6.2% in the first quarter. This is the second successive quarter that yields have risen after a lengthy period of stagnation.

The rental yield, which is the property’s rental income as a percentage of its current capital value, is an important factor in property investors’ purchasing decisions as it generates cashflow, allowing them to meet mortgage commitments and other expenses relating to their property.

Landlords continue to experience strong levels of tenant demand and believe that demand will continue to increase in the coming year.

Nearly a third of respondents (30%) predict tenant demand will increase from current levels over the next 12 months, with half (50%) expecting demand to remain at existing levels. A fifth of landlords anticipate an easing off of tenant demand during the period.

John Heron, Paragon Mortgages’ managing director, said: “Landlords have enjoyed increased levels of tenant demand throughout 2008 and 2009 and it looks like that will continue into 2010. A lack of available mortgage finance makes it difficult for potential homeowners to purchase property and many people remain unwilling to commit to purchasing a home in the current house price environment.

“In addition, landlords continue to experience strong demand from those sectors of the population that have historically driven the growth of the private rented sector, such as students, migrant workers and young, mobile professionals. In some markets, this is feeding through to rental increases, allowing landlords to improve the yield on their property.

“A strong yield level will continue to attract investors to the private rented sector, particularly as the returns from savings accounts are poor and the stock market remains volatile. The challenge for these investors is accessing finance to fund their purchases as many lenders in the buy-to-let market have either closed to new business or have reduced their focus on the sector. The Government has launched a number of initiatives to recommence lending in the mainstream mortgage markets, but niche sectors, such as buy-to-let, also need to be catered for as they play an important role in the UK mortgage market.”

Evidence that activity in the housing market is picking up, albeit from very low levels, has increased surveyor optimism.

The net balance of surveyors expecting price increases rose for the first time since May 2007 with 6% more chartered surveyors expecting house prices to rise over the next three months compared to a negative reading of 11% in May. The rise in optimism has been driven by the continuing up-turn in buyer enquiries and falling levels of fresh supply.

The number of chartered surveyors reporting an increase in new enquiries rose again in June, with a net balance of 67% reporting a rise rather than a fall, the eighth consecutive monthly gain and the highest figure since the series began in April 1999.

The level of stocks on surveyors’ books continued to provide some support for property prices while new instructions remain marginally in negative territory. In fact the amount of properties on surveyors’ books has declined by around one third over the past year. Consequently, the net balance of surveyors reporting a fall in house prices rose from a negative balance of 43.8 to 18.1%, the highest reading since September 2007.

The survey also contains more definitive signs that the rebound in enquiries is now feeding thorough into increased transactions. Sales rose again but from very depressed levels. The average numbers of properties sold over the past three months rose to 12.7, up from 11.7.

Newly agreed sales, measured on a net balance basis, increased sharply, reaching the highest level since August 1999.

RICS spokesperson Jeremy Leaf said: “Although the market is showing signs of improvement, it is unlikely that there will be a sustained upturn while mortgage lenders remain risk adverse. A lack of stock on the market is providing a platform for modest price increases.

“While supply remains tight, the market may continue to show tentative signs of firming but instructions are starting to increase in some regions and this could dampen any meaningful recovery as long as economic conditions remain quite so uncertain.”

In particular, the CML believes it is important to recognise that the legal position of tenants whose landlords default on their mortgage will vary, depending on whether their tenancy is recognised (and their landlord has a buy-to-let mortgage), or whether it is unrecognised and potentially the lender is not even aware of it (because the borrower has an owner-occupier mortgage and is in breach of its terms, because they have not gained consent from their lender to let the property).

The vast majority of tenants will have landlords with buy-to-let mortgages, and will have tenancies recognised by the lender. These tenants already have significant protection and their tenancies will be honoured by lenders - providing that they are not in breach of their tenancy agreement.

Lenders are also sympathetic to the position of tenants of landlords who have failed to gain consent to let their property, but the legal position is more complicated. Lenders have contractual obligations to the borrower, despite their breach of the mortgage terms, and there are also potential legal constraints on their ability to collect rent from tenants in this position.

The CML intends to work with the Government to resolve these complexities and ensure that the notice period for these tenants is consistent with the lender’s other legal obligations.

CML director general Michael Coogan said: “Everyone sympathises with the position of good tenants who were unaware their landlord was not paying the mortgage. In most cases, tenants have a recognised tenancy because their landlord has a buy-to-let mortgage, and these tenants are protected.

“For the minority of tenants whose landlords should never have been renting out the property at all, we look forward to working with Government towards a resolution that appropriately balances the outcomes for lender, borrower and tenant.”

This is despite borrowers needing large deposits to be able to enter the market and overall lending remaining constrained.

House purchase lending accounted for 35% of all mortgage lending in March, up from 31% in February and the highest proportion since December 2007.

Remortgaging, on the other hand, still accounted for a higher number of loans in March, but the number was only 8% higher than in February and 45% lower than in March 2008. The CML expects remortgaging to remain muted, both because of attractive reversionary rates automatically cutting in for many borrowers as they come out of their existing deals, and because of reduced remortgaging opportunities for those with reduced levels of equity as a result of falling house prices.

Within house purchase lending, first-time buyers accounted for an increasing share - 40% of loans, up from 38% the previous month. This is the highest proportion since April 2005, although the absolute number of first-time buyers remains low - 12,500, up from 9,200 in February but well below the 17,800 recorded in March 2008.

First-time buyers on average borrowed three times their income and 75% of the value of their property in March. Both these average measures were unchanged from February. For those with deposits large enough to enable them to buy, the combination of low interest rates and lower house prices mean that their monthly interest payment now equates to only 15.1% of their income, the lowest proportion since June 2004 (15.1%).

There were 18,900 home mover loans in the month worth £18.9bn, up from £14.9bn in February - an increase of 27%, but 34% down on March 2008. The average home mover loan was £115,000, compared with £135,000 in March 2008. Interest payments typically consumed 11.4% of a home mover’s income, the lowest proportion since January 2004 (11.4%).

CML head of research Bob Pannell said: “Because the flow of lending is still constrained, there is a sharp dividing line in the housing and mortgage markets between those who can raise a substantial deposit and those who can’t.

“For those who can, the burden of debt payments is low and mortgage interest is consuming proportionately less income than for a number of years. This is good news for now. Even so, a mortgage is a long-term commitment. People borrowing now should be mindful of the years ahead when interest rates eventually rise, as they will.

“But for those without substantial deposits, entering the market is still both difficult and uncertain. While there are some signs of demand increasing, house prices remain weak and lending criteria inevitably remain inherently conservative as lenders necessarily seek to rebuild their capital position.”

The offer is highly competitive and includes a free valuation up to £640 and a free legal package for those wishing to remortgage.
In addition, the Coventry is launching a 3 year fixed rate mortgage and a new discounted product offering 1 per cent off Coventry’s Standard Variable Rate for the next 3 years.

Key features of the new products are:
The Coventry residential 5 year 4.49 per cent fixed rate mortgage. Fixed until 30th June 2014, up to 65 per cent loan to value
The Coventry residential 3 year 3.99 per cent fixed rate mortgage. Fixed until 30th June 2012, up to 65 per cent loan to value
The Coventry SVR less 1 per cent discounted mortgage, giving a current rate of 3.74 per cent. Discount available until 30th June 2012, up to 75 per cent loan to value.

Colin Franklin, head of sales for the Coventry, said: “A rate of 4.49 per cent on a 5 year fixed mortgage represents fantastic value for people wanting to lock in at current low rates. Customers looking for security and peace of mind can fix it with the Coventry!”

Home buyers may have the size of their mortgage limited to a multiple of their income under possible reforms outlined by the Financial Services Authority yesterday.

Prime Minister Gordon Brown has advocated a maximum loan-to-value level of 90% but Lord Turner, FSA chairman, said: ‘A key choice in product regulation would be between LTV and LTI (loan-to-income) limits. There is a prima facie case that LTI limits are more likely to be appropriate given that it is the relationship between income and loan repayments which determines whether a household can service its debt.’

Average LTI levels have risen a third in the past decade from 2.5 times to 3.2 times, with six or even eight times income once common at some of the more aggressive lenders. As a result, interest payments as a proportion of income soared from 11.5% in 2002 to 18.5% last year.

Source: Daily Telegraph

This is according to Paul Holmes, chief executive officer of property advice website Firstrung, who suggested that such people should delay securing home loans until banks and building societies begin providing mortgages with “sensible levels of deposit”.

He stated that to buy at the moment, when lenders are asking for deposits of up to 30 and 40 per cent, would not be wise.

The expert said: “When they start offering mortgages with ten per cent deposits, freely available, that will tell a FTB that the market has bottomed out.”

However, the results of a survey conducted recently by Rightmove suggested that nearly seven in ten potential FTBs believe now is a good time to invest in property, while 21 per cent reported a belief that it is better to buy now than to delay purchasing for a year.

It said that new enquiries from potential home buyers increased for the sixth consecutive month in April, taking the number of surveyors reporting rising interest to the highest level for almost a decade.

The climb from a very low base has seen 41% more Chartered Surveyors reporting a rise than a fall in new buyer enquiries up from 32% in March.

In London, the balance of surveyors reporting increased buyer interest, 70% compared to 63% in March, was the second highest figure recorded since the series began.

But surveyor estate agents are still selling less than one property per week, with the average agent recording 10.6 properties sold over the past three months – up from 9.7 in March.

A revival is being thwarted by the poor economic picture and the reluctance of sellers to place their homes on the market, which Rics says is due to falling prices and reduced activity discouraging sellers.

The cost of having to pay for a Home Information Pack (Hip) is proving a further deterrent, as from April all homes going on sale had to have a pack ready upfront.

The report said: ‘Anecdotal evidence suggest the fall in new vendor instruction this month is due to the change in the rules governing Home Information Packs that were introduced on April 5th.’

The balance of surveyors reporting falling rather than rising prices showed substantial improvement, changing from 72.1% in March to 59.9% in April. The figure remains deeply in negative territory, but it represented the best reading since January 2008.

Meanwhile, Rics said an increase in sales-to-stock ratio for fourth consecutive month suggested prices could stabilise later in the year - although this improvement is being affected by the lack of new properties coming on to the market.

Forecasts from Rics agents are getting better but 43% still expect prices to fall (described as the ‘least worst in 17 months).

Source: Royal Institution of Chartered Surveyors May 2009

Rics spokesperson Jeremy Leaf said: ‘There are tentative signs that the market is starting to pick up but transactions remain at very low levels and we are unlikely to see significant improvement while money remains in short supply and the employment picture is uncertain.

‘Transaction levels could benefit from an increase in supply but falling prices and low interest rates are discouraging sellers as is the latest change in HIPS legislation.

‘House prices could stabilise in the coming months but prospective purchasers - and first-time buyers particularly - will continue to encounter challenges while banks maintain current loan to value ratios and make accessibility difficult even for those who have accumulated considerable equity in their existing properties.’

Despite Rics reporting renewed interest in the property market since the start of the year, house prices continue to fall. Property prices fell 13.6% year-on-year in March, although the decline has begun to slow, according to Government figures published today.

The fall in the average cost of a UK property between February and March eased to 1.3% from a 2.7% dive seen the previous month, according to the Department of Communities and Local Government.

David Smith, senior partner at estate agents Carter Jonas, said: ‘Although house prices are still falling, they’re not falling as quickly. This is a positive sign that we might be reaching the bottom of the market, although talk of a recovery is probably a little premature.

‘On the ground, we are definitely seeing encouraging buyer activity and a surge in new instructions, which suggests there is certainly a lot more confidence in the stability of the housing market than there was a few month ago.’

According to Alliance & Leicester Mortgages, there are deals available at the moment for as low as 2.99 per cent.

Despite this, the bank found that 81 per cent of borrowers who are currently on their lenders’ standard variable-rate (SVR) mortgages have no immediate plans to seek out cheaper products.

Meanwhile, 14 per cent of existing SVR mortgage holders intend to wait until house prices and interest rates pick up before searching for better deals.

Nici Audhlam-Gardiner, director of Alliance & Leicester Mortgages, said: “It is perhaps unsurprising that some homeowners currently on SVR deals are reluctant to commit to a new mortgage, but past experience shows that fixed rates tend to increase in price before the base rate.”