Interest Rates. Base Rates. Mortgages.
Apart from the so-called “credit crunch”, mortgage interest rates have dominated all aspects of our lives over the last year to 18 months; so much so that we automatically assume a lower interest rate on a mortgage to be better for our circumstances than a higher interest rate. But that’s not necessarily the case.
Home Equity line of Credit | Loans
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”
“This 2.38% tracker is unbeatable”
“Get this 4.09% fixed rate now before it disappears”
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 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, did you see the real mortgage interest rate of 2.29% that was being offered during March 2009? It was everywhere you looked and virtually unmissable. A number of mortgage advisers reported an increase in enquiries during March because of the product’s attractiveness.
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).”
Home equity loan
We all want the lowest monthly payment on our mortgage and lenders know this. One of their strongest marketing tools is an interest rate that just looks cheaper than everybody else. It may well be the cheapest rate around. Just do your due diligence first or speak to a Mortgage Adviser and have them do it with you. Whatever you do, choose a mortgage product that suits your circumstances and saves you money, not one that just grabs your attention with a low interest rate.
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