Mortgage Interest Rates – Why Lowest Is Not Always Best

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”

“Fantastic Fixed Rate of 3.93%”

“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 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 interest rate being charged on the mortgage could afford to be set that low, which is fine if you urgently need to maximise your monthly income or minimise your monthly expenditure over the very short term. For example, you may want to kick-start some savings or quickly pay off some other debt hanging over your head that is being charged at a higher rate of interest than your mortgage.

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.

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).

Mortgages may well be tightly regulated products but they still need to be sold to us as consumers. They DON’T sell themselves. Lenders have been selling them for a very long time and know that we’re all seeking the lowest monthly payment on our mortgages. As with any product from any other industry, “cheap” almost always comes at a price. Thoroughly investigate the cheap, low, headline grabbing interest rates first or do so with the help and assistance of a knowledgeable adviser. Otherwise, that 100 Pounds you think you’re saving now, could easily turn into a 200 Pounds monthly loss and a hefty penalty to exit a mortgage you no longer want.

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