How To Spot Mortgage Interest Rates That Are Not WYSIWYG
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.
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”
“2.01% – Best Mortgage Rate Available … Anywhere”
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.
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).
What very few realised though was this product was a tough one for most people to take advantage of. According to the Council of Mortgage Lenders the average Loan-to-Value in January 2009 was 76%. Put another way, the average deposit or equity in a UK home was 24%. Yet this fabulous, headline-grabbing product required a 40% deposit – almost twice the average available. Furthermore, this mortgage product also required borrowers to have a “squeaky clean” credit profile.
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.
Beyond the tantalising headline rate of 2.29% for the first year, however, 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 short 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?
Yet the mortgages attracting the lowest fixed rates right now also have the shortest timeframes too, such as 2 years or less (similar to the one mentioned above). This gives us some insight into how lenders currently view the short to medium term – they too see interest rate risks for the next 2 – 3 years as the mortgages with the lowest rates AND the lowest fees are based on a variable rate (e.g. Variable Capped, Variable Tracker and Standard Variable Rate itself).
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.
Tags: best interest rate, fixed rate mortgages, tracker rate mortgages, loans