| Mortgage Interest Rates - Why Lowest Is Not Always Best |
| Articles - Savings |
|
Mortgage interest rates. Nothing but mortgage interest rates.
Mortgage interest rates. Nothing but mortgage 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" "Remortgage Now at the Lowest Rates Possible - 2.83%" "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. Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09).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 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 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 Pounds every month (or 2,520 Pound 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. 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. The lowest fixed-rates, however, are primarily being offered on the shortest terms i.e. anything upto 2 years. This provides us with a good indication of where the lenders believe rates are expected to head over the next few years. In effect they are saying "if you want to fix your mortgage for longer than the shortest timeframes currently on offer, then be ready to pay a significant premium for this safety. Otherwise you will have to settle for a variable-rate product of some description (e.g. capped, tracker or standard variable)." The ultimate goal for anyone borrowing money is to get the most they need or require at the lowest possible rate of interest. This is true of all loans whether it be mortgages or any other loan for that matter. If there is a difference when it comes to mortgage interest rates and the "cheap" interest rates being advertised, it's because a mortgage concerns our homes - the very roof over our head. That's why it's absolutely vital to look past the headline-grabbing mortgage rate and see if the product itself delivers what you need. Whether you do this on your own or with a mortgage adviser is a matter of personal choice for you. Just be sure to check the product very carefully, not just the mortgage interest rate on immediate display. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. You can access more information on interest rates and mortgages by going to the Opening Doors Financial Research website or by contacting one of their associated financial advisors or mortgage advisors |