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.
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"
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.
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 big trouble 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.
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).
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.)
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).
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.
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.
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"
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.
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 big trouble 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.
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).
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.)
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).
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.
About the Author:
More articles on mortgages and interest rates can be found at the Opening Doors Financial Research website. With financial advisors & mortgage advisors they help consumers fully grasp their finances.
No comments:
Post a Comment