Interest Rates … Interest Rates … Interest Rates.
These phrases have almost hypnotised us for two years come Summer 2009. We’ve heard them so often and seen interest rates come down so far, we automatically think a mortgage product with a lower rate of interest is better than any other with a higher rate. For the most part, this is true – 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:
“Massive Rate Reduction to 2.51%”
“Remortgage Now at the Lowest Rates Possible – 2.83%”
“Try this Tracker of 2.2% Before It Goes”
Although the mortgage rates shown above are just examples that have been adapted from real world advertisements, they are most definitely headline grabbers. Whether they be shown online or offline, at least one of these mortgage interest rates is likely to catch our attention.
These advertisements are, actually, a sobering reminder that mortgages are products that still require salesmanship and marketing skills. Like other products for other industries they must still be sold. But as attractive as these low interest rates are and as keen as we might be to secure such a mortgage rate, a lender’s criteria can keep the door closed on us.
Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09).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.
The rate could afford to be set that low because it was only fixed at that level for one year but you had to keep the mortgage for three years. This is fine for someone that wants or needs to increase the amount of cash available to them every month in the SHORT term. For example, you have a strong credit history but just need to get through a current financial strait such as clearing a credit card, or you wish to rebuild some savings over a 12-month period.
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.
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