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Mortgages - Beware the Headline Interest Rate


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Interest Rates. Base Rates. Mortgages.

They have dominated our newspaper frontage, television time and party talk for the last 18 to 19 months. And we have been lulled into the belief that a lower interest rate is automatically better than a higher interest rate. Yet many of us are fast learning that this is not always the case. What we see is NOT what we, always, get.

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"

"Try this Tracker of 2.2% Before It Goes"

You would be right to think the above advertisements are simply based on real-world ads. (We don't wish to infringe on anyone's copyright or upset any lender inadvertently!) But it is worth remembering that the rates shown are very close indeed to those offered recently; interest rates that are designed to stop us dead in our tracks and pay 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.

Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09).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.

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).

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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