Mortgages - Beware the Headline Interest Rate
By admin | Category: Fixed Rate Mortgage, Mortgages, Tracker Mortgage
Interest Rates … Interest Rates … Interest Rates.
They have dominated our newspaper frontage, television time and party talk for the last 18 to 19 months. And we have been lulled into the belief that a lower interest rate is automatically better than a higher interest rate. Yet many of us are fast learning that this is not always the case. What we see is NOT what we, always, get.
For example, in recent months we have seen bold headline interest rates in newspapers, financial magazines and online search engine advertisements saying …
“2.19% - Lowest Rate Available in the Market”
“Fantastic Fixed Rate of 3.93%”
“Try this Tracker of 2.2% Before It Goes”
Admittedly, the ads shown above are slightly tongue-in-cheek in the wording used but the rates themselves are VERY close to those being seen by consumers with mortgages. The point though is this:
The interest rate is primarily a headline grabbing device. The rate being promoted might well be real but the lender’s criteria to achieve that rate will often prevent many borrowers from ever getting it.
Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09). Everybody wanted it - from mainstream residential borrowers to buy-to-let investors with an adverse credit history. Bizarrely, they all thought they could get it judging by the increased enquiries mortgage advisers received for the product.
Yet this same 2.29% interest rate from a High Street lender was one hell of a demanding mortgage product i.e. you had to be someone with a massive deposit of 40%, spotless credit history and above all … a willingness to accept 2.29% for just 12 months whilst being locked-in to the mortgage for a further 2 years.
That’s why the initial interest rate was that low. If you had a truly short-term financial “hump” to get over for the coming year AND you could meet the strict lending criteria, then the product was a match made in heaven. For example, on a mortgage of £150,000 and an interest rate of around 4%, you would have been saving more than £210 every month (or £2520 for the year). Maybe this product would have suited many women in the UK with mortgages that also wanted to clear a credit card balance rather urgently. According to Abbey Credit Cards, the average credit card balance held by UK women and the saving this mortgage product gave were roughly the same.
However, beyond the tantalising headline rate of 2.29% for the first year there is the major interest rate risk to consider for this kind of mortgage. With the Bank of England base rate at an all-time low, what direction logically remains for interest rates over the short to medium term of 1 - 3 years? Of course it would be political suicide to raise rates before a General Election (2010) but what about after that?
True, it’s anybody’s guess when rates will rise again but we do know that lenders are predominantly offering the very lowest rates for the shortest possible timeframes, mostly 2 years or less (such as the one above). If you want a longer timeframe with a fixed-rate, be ready to pay a premium of 1% and more. Lenders, themselves, see considerable risks for the next 2+ years and have hedged their bets by offering variable-rate products in one form or another (e.g. Trackers, Capped-Rate and Standard Variable Rate).
Mortgages may well be tightly regulated products but they still need to be sold to us as consumers. They DON’T sell themselves. Lenders have been selling them for a very long time and know that we’re all seeking the lowest monthly payment on our mortgages. As with any product from any other industry, “cheap” almost always comes at a price. Thoroughly investigate the cheap, low, headline grabbing interest rates first or do so with the help and assistance of a knowledgeable adviser. Otherwise, that £100 you think you’re saving now, could easily turn into a £200 monthly loss and a hefty penalty to exit a mortgage you no longer want.
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