Mortgage Matters - How lenders market their mortgage products
Continuing with last month's theme of Interest Rates, it's worth looking into how lenders market their mortgage products in some more detail.......
Continuing with last month's theme of Interest Rates, it's worth looking into how lenders market their mortgage products in some more detail.
Most existing or potential borrowers will have been faced with the choice of between a 2 or 5 year fixed rate. The main two factors that will influence the choice are the Loan to Value percentage (LTV) and the individuals attitude to the risk of increased mortgage costs. Firstly, if the LTV is high - 90 or 95% then so will be the rate, in comparison cheaper rates will be found under 85% until the very cheapest are found around 60% LTV. With Interest Rates still at all time lows 5 year fixed products have become more popular then 2 year rates. However, up at 90% LTV the 2 year fixed rate is still favoured - the hope being that with moderate house price inflation and some repayment of the capital a cheaper product can be found at the earliest opportunity.
Another consideration is the Product Fee - typically these range from £500 to £2000, it normally works out better to select a higher rate with no fee for those with small mortgages and a low rate/high fee for those with large mortgages. Without the advice of a broker it's easy to opt for the eye catching low rate, which may not be the best choice.
When it comes to risk - this is just a case of how long a borrower needs the certainty of payments for. Of course nobody has a crystal ball - choices can only be made on the here and now; the prevailing economic background and the Bank of England will decide the future direction of interest rates.
It's also worth mentioning Early Repayment Charges (ERC's) If you redeem a mortgage during a fixed rate period then a percentage of the outstanding loan will be charged as a penalty. Why would anyone do this ? the most common reason would be that you want to raise further capital for home improvements or a house move, but your lender is not as generous as others and can't lend you what you need. These calculations need to be carefully considered by an expert mortgage broker; the solution may be to keep a very good product you already have and top up with a 'Second Charge' mortgage, or alternatively pay the ERC in order to remortgage to a lender who'll give you what you need.
There are still 'variable rate' products available that will move in tandem with the Base Rate, but with no ERC - ideal for flexibility if a major change to your borrowing is expected in the short term.
There's not enough space or time to look at Buy to Let mortgage products - here the choice between 2 or 5 year fixed products can actually determine the borrowing amount - more on this next month !