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Is A Cheap Mortgage A Thing Of The Past?
Saving money is often a day to day priority. However, with mortgages: bargain is not always best. Shopping around by comparing mortgage rates, lenders and deals can overwhelm the average person which can lead to panic buying and bad choices. Discounted rate mortgages are often seen as a quick fix, cheap mortgage option as they offer the borrower a 'cheap' mortgage whatever the direction of the market. This, initially, seems to be a very good deal. However, the discounted offer is usually only for a very short time and once this ends the borrower is subject to a massive increase of the interest rate of their mortgage. This, coupled with the instability of the lending market can lead to very unpredictable repayments. Currently the mortgage market is offering less and less cheap mortgages as interest rates are slowly being cut by the Bank of England and the mortgage lenders are slow to follow suit. Initially this sounds like a good thing for mortgage repayments but the consequences are leaving many existing borrowers substantially out of pocket. As house prices are falling, the price of food and drink is drastically rising; meaning borrowers are having to spend more money on household and day to day items instead of repaying their mortgage. This also means that new buyers are subject to stricter mortgage terms and conditions, in an effort by the lenders to slow the alarming number of house repossessions from missed repayments or defaulted mortgages. Unlike mid-2003 when mortgage lenders were falling over themselves to offer cheap and variable rate mortgages and to sign up as many new buyers or capture existing borrowers as they could, the assessment criteria for mortgages are becoming very tight, which works to the disadvantage of new buyers and especially for existing mortgage borrowers who are looking to renegotiate their mortgage for a better deal; their previous outstanding loan will count significantly against them. The easiest way to a cheap mortgage is to remortgage every so often, however timing this right requires expert mortgage advice and keeping an eye on how the mortgage market is doing. As mortgages are becoming a very competitive market, remortgaging is very popular. However, mortgage lenders are very aware of this and have dubbed serial remortgagers as 'rate tarts' and in order to combat this many have changed the small print on mortgages to impose heavy penalties. Conversely with mortgages, often paying more can save the most money. Offset mortgages often have the highest interest rates and are only cost effective if the borrower has existing savings of around 20% of what they are wishing to borrow. Savings act as an interest buffer as the borrower only pays interest on the loan amount and so less interest is paid overall. As all debts are usually consolidated into the cheap mortgage, any credit remaining on the consolidated accounts also helps to lower the amount of interest paid as interest is calculated daily. The downside is that you will not receive interest on any savings used to offset the mortgage and if circumstances change then the high repayments may be too much of a financial strain. Yet as the old adage says: 'You need to spend money to make money'. Spending money on a mortgage can give the borrower the chance to consistently have a cheap mortgage. |
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This intel was contributed by Aaron Hill
Aaron Hill
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May, 2012
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