How To Spot Mortgage Interest Rates That Are Not WYSIWYG
Posted on April 14, 2009 in the Mortgages category
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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:
“2.19% – Lowest Rate Available in the Market”
“Remortgage Now at the Lowest Rates Possible – 2.83%”
“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.
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Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09).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.
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.
Nevertheless, if someone is able to look slightly ahead i.e. just 13 months – which comes soon enough – they will see for themselves a good deal of interest rate risk. After all, where do you believe rates can go now given the Bank of England base rate is almost at zero? Hence, the attractiveness of fixed rates in the current climate.
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).
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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I can’t blame the attractiveness of fixed rates…it’s a difficult climate and many of us can’t stand no more “easy ways” and “alluring promises”…
Great info. I’m sure that many people wished that they had read this about 1 year ago. The foreclosures these days are getting out of hand in Los Angeles.