HJDS Investment Group BLOG

Mortgage interest rates. Nothing but mortgage interest rates.

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.

Recently, newspaper advertisements and online advertisements in particular were grabbing the headlines with statements similar to the following:

“2.19% – Lowest Rate Available in the Market”

“Remortgage Now at the Lowest Rates Possible – 2.83%”

“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.

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.

Yet this same 2.29% interest rate from a High Street lender was one hell of a demanding mortgage product i.e. you had to be someone with a massive deposit of 40%, spotless credit history and above all ? a willingness to accept 2.29% for just 12 months whilst being locked-in to the mortgage for a further 2 years.

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.

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.

The lowest fixed-rates, however, are primarily being offered on the shortest terms i.e. anything upto 2 years. This provides us with a good indication of where the lenders believe rates are expected to head over the next few years. In effect they are saying “if you want to fix your mortgage for longer than the shortest timeframes currently on offer, then be ready to pay a significant premium for this safety. Otherwise you will have to settle for a variable-rate product of some description (e.g. capped, tracker or standard variable).”

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.