Mortgages – Beware the Headline Interest Rate
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.
Recently, newspaper advertisements and online advertisements in particular were grabbing the headlines with statements similar to the following:
“2% above base – nothing lower around”
“Fantastic Fixed Rate of 3.93%”
“2.01% – Best Mortgage Rate Available … Anywhere”
You would be right to think the above advertisements are simply based on real-world ads. (We don’t wish to infringe on anyone’s copyright or upset any lender inadvertently!) But it is worth remembering that the rates shown are very close indeed to those offered recently; interest rates that are designed to stop us dead in our tracks and pay attention.
The interest rate is primarily a headline grabbing device. The rate being promoted is real, of course, but the lender’s criteria to achieve that rate will often prevent many borrowers from ever getting it.
For example, consider the fixed rate of 2.29% that was being heavily marketed until the end of March this year, 2009. Everyone wanted it and clamoured through the doors of mortgage advisers to get it (not literally of course).
Nonetheless, many consumers were left to discover just how tough it was to get this great mortgage rate. After all, how many of us have a 40% deposit for a new home or 40% equity in our current property? In January 2009 the Council of Mortgage Lenders recorded the average equity/deposit as being 24%. Healthy enough but nearly half of the amount required by this product and the lender’s criteria. Furthermore, this product required mortgage applicants to have a near-on flawless credit history and to be willing to hold the mortgage for 36 months whilst only getting the low fixed-rate for just 12 months. (IMPT: Please read that last sentence again as it is key to understanding this product and products similar to it.)
That’s why the interest rate being charged on the mortgage could afford to be set that low, which is fine if you urgently need to maximise your monthly income or minimise your monthly expenditure over the very short term. For example, you may want to kick-start some savings or quickly pay off some other debt hanging over your head that is being charged at a higher rate of interest than your mortgage.
With base rates being at an all-time low and approaching zero percent, mortgage payments are great for mortgage borrowers … for now. But what about the medium term of approximately 2 – 3 years? The attractiveness of a fixed-rate becomes clear when it looks as though mortgage interest rates can only go up when they start to move again. From the start of the 2nd year of the mortgage there is considerable interest rate risk to think about before taking this product or any such mortgage with similar features.
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 Pounds you think you’re saving now, could easily turn into a 200 Pounds monthly loss and a hefty penalty to exit a mortgage you no longer want.
