Interest Rates … Interest Rates … Interest Rates.
These phrases have nearly hypnotised us for two years come Summer 2009. We’ve heard them so often and seen interest rates come down so far, we automatically reckon a mortgage product with a lower rate of interest is better than any other with a higher rate. For the most part, this is right – mortgage interest rates are “WYSIWYG” i.e. “What You See Is What You Get”). But not always.
Since the Bank of England Base Rate has plummeted and mortgage interest rates have tumbled, we have been exposed to advertisements in both the online and offline media with the most captivating headlines:
“2.19% – Lowest Rate Available in the Market”
“Fantastic Fixed Rate of 3.93%”
“2.01% – Best Mortgage Rate Available … Anywhere”
You would be right to reckon 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 above advertisements go some way to helping us remember that mortgages are sold like most other products. The interest rate is used to grab the headlines and get our attention. The interest rate HAS to be real of course (otherwise huge distress for the advertiser) but there are a number of criteria from the lender that so easily prevents us from getting such a low rate of interest.
Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09).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.
Nonetheless, many consumers were left to learn just how tough it was to get this fantastic 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 small 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.
Beyond the tantalising headline rate of 2.29% for the first year, but, 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 small 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?
Right, it’s anyone’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” nearly always comes at a price. Thoroughly investigate the cheap, low, headline grabbing interest rates first or do so with the help and help of a knowledgeable adviser. Otherwise, that 100 Pounds you reckon 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.