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The Interest Rate

The interest rate element of the mortgage is the most important. This is for one very simple reason.

IT CAN CHANGE, and in doing so it may upset your household budget.

It is vital to understand that while you may buy a house today with a mortgage costing £500 pm for example, interest rate changes could reduce that, or increase it.

In the past these changes have taken place very quickly. In the space of just a few years between the late 1980's and early 1990's market rates almost doubled, and people who had already stretched themselves to buy property then found themselves paying hundreds of pounds more and in many cases they could not afford it.

This resulted in the repossessions and negative equity crisis of the early to mid 1990's.

For buyers this means that it is important to buy on the basis that it will be a home for a reasonable period of time, say 2-3 years. (In a flat market the transaction costs on buying/selling could eat into any profit you might hope to make, and since they would not be offset by gains made on the property, it might be better to rent. Talk to your Financial Adviser.) Also, if maxing out your budget on a mortgage, give serious consideration to a fixed rate mortgage for the first few years to protect you in the event of interest rate rises.

To see how rate changes could affect you use the Interest rate calculator below. You should note that rates are currently low (when compared to most of the past 25 years ). If rates of 10-12% within the next few years would be unaffordable then be careful. Also experiment with rates of 8 - 9% - if they would be unaffordable within the next 3-4 years be very careful.

Mortgage Required:

Interest Rate , enter 10% as 10:
 

Monthly Payment:

But be careful, at 12% it will be:

Calculator Notes

The above calculator is designed for guidance only and advice relating to any of these areas should be sought from us, please click on the contact us link and email your enquiry. It does not include any element of capital repayment or insurance and these aspects will mean that the total cost any real mortgage will be higher.

  • This calculator does not include any element of capital repayment or insurance and these aspects will mean that the total cost of any real mortgage will be higher. The repayment amounts are based entirely on the given interest rate and do not include the charges that would be included with any mortgage product.
  • The repayments shown are not based on an actual mortgage product, therefore the repayments are not guaranteed and will differ between mortgage products and lenders.
  • The above calcaulator is designed for guidance only and advice relating to any of these areas should be sought from your financial adviser.

Interest Rates, the choice is yours

With the vast range of mortgages products ,available it might seem that you can almost pick and choose the rate you want to pay. One of the ways in which we help you is to sort through them and find the right one for you. While the Interest Rate is part of that equation, it is not the whole story. The overall structure of the contract is also important. Broadly speaking all good offers have to be paid for in some shape or form, and the question is "do the advantages outweigh the disadvantages?"

Types of Interest Rate Contract

Floating / Standard / Variable Market Rate - you borrow at the lenders normal rate of interest. No bells, no whistles, and, normally, no early repayment charges if you want to move. The rate will vary as the market changes.

Loyalty Rate Mortgages - existing customers who meet the lender's criteria may be offered a discount to the Standard Rate.

Fixed Interest Rate - the rate is fixed at an agreed rate and for an agreed period of time. Your payments are not affected by either increases or decreases in the market Interest Rate during the agreed period.

When the Fixed Period ends you will normally be expected to stay with the lender and pay the full Standard Rate for a further 1-3 years. If the lender has a reputation for being expensive with regard to its standard rates this would be something to take into account.

Early Repayment Charges can also be very high should you wish to break the agreement, and this is another area to assess. If you fix for 5 years and rates fall you might want to switch to a lower rate. You are likely to find doing so very expensive, because of Early Repayment Charges.

Because no one knows what future interest rates will be Fixed Interest rates are best used when either they represent an attractive offer and way of saving money in the short term, and where the risk of losing out through downwards rate changes is one worth taking, OR, when you are concerned that rates may move upwards and that this would cause you serious problems with your budgeting

Capped Rates - these are mortgages that place an upper limit on your mortgage rate while still allowing you to benefit from reductions in interest rates.

Complex Offers - some schemes are quite complex, and what may be given on one hand (a low interest rate) may be taken back with the other (an application fee).

Offset Mortgages - these are mortgages where the lender offsets any interest on your deposits against the interest due on your mortgage. They are very popular but they are not for everyone. However if you have significant funds on deposit, (which should not be invested elsewhere for the longer term), and the institution offers both a good deposit interest rate AND a competitive interest rate then the package can be attractive. We can assess this for you.

Special Cases - lenders are very inventive in what is an increasingly competitive market. The attractiveness of such offers would depend upon your tax situation. All such offers need to be very carefully evaluated given your own particular circumstances. (For example the Airmiles one was stunning value for a higher rate taxpayer doing lots of European flights on scheduled aircraft, but of little worth to the ordinary person who might have used them to go on a long haul holiday.)

Debt Consolidation and “CCJ Allowed” Mortgages

These can be ideal for the right type of person – which is someone who has gone through a tough time but is now financially stable and confident, whilst not being considered suitable for normal mortgages, for example they are self employed and have turned their business round, or they got into trouble after redundancy but now have a new and stable career.

But they can be a very expensive mistake indeed for the person who has a lot of unsecured debts to credit cards, car loans, utilities etc and who has not dealt with their fundamental problems. All too often they convert a bunch of creditors who would each accept a “whatever you can afford” payment into a single creditor who can force the sale of the house.

If you are reading this and feel that the first paragraph describes you, contact us. As financial advisers we can often made a case for a regular lender to offer you normal terms because we can show them that your financials are fundamentally sound.

If you think the second paragraph represents your situation do come and talk to us, but unless we see something you've missed, we'll probably put you in touch with Citizens Advice or another agency who can help you.

Summary

Selecting the right type of interest contract is a complex area, and the role of your Mortgage Adviser is to help you find the mortgage that suits your needs.

The above calculator is designed for guidance only and advice relating to any of these areas should be sought from your Financial Adviser.

Your home may be repossessed if you do not keep up repayments on your mortgage.

For details of our fees for mortgage business please see our page "How we are Paid".

The Financial Services Authority does not regulate loans or some forms of mortgage.

Last updated on November 2, 2007