As we move closer to the end of 2009 with the base rate poised at 0.5% many attractive deals are now in place for borrowers who are prepared to take the risk. We explore the pitfalls of mortgages that involve lender discounted variable rates as low as 1.99%.
Since May this year we have been urging borrowers to opt for tracker rate mortgages. This was at a time where some brokers were playing the uncertainty card and pushing buyers towards fixed deals that were no longer attractive. The boat had sailed. Currently, we still believe that you are better off in most cases by choosing a tracker mortgage, but it has to be for the short term and it must follow the Bank of England base rate with no extended tie-ins.
However, many borrowers are confused by the new discounted variable rate mortgages on offer. We would urge these borrowers to be careful. A discounted mortgage deal offers you a reduction on the bank standard variable rate for a period of time. The HSBC deal is a discount of 1.95% on their current standard variable rate of 3.94%, which gives you the 1.99% deal on offer.
After your discounted deal ends you revert back to the bank standard variable rate. What you need to know is that the bank can decide to raise their standard variable rate at any time. This means that your mortgage will not be directly linked to any Bank of England base rate decisions. This means that how much you pay each month will be decided by how much money the bank wants to make from you.
The Bank of England and the Government are doing everything they can at present to ensure rates stay low. If you opt for a bank discounted variable deal then you are at the mercy of the bank. With the impact of the credit crunch still fresh in everyone's mind, opting for one of these mortgages would be unwise as the banks' are looking for ways to rebuild profit.
However, not all trackers are as good as they seem. Woolwich have introduced a 1.98% mortgage deal for one year and only a £999 arrangement fee. Make sure you read the small print though as there is a 2% penalty if you want to move within three years. That's £3,000 on a mortgage of £150,000.
Our View:
The risk of rates rising dramatically in 2010 is low. However, the likelihood of rates rising above 2% in 2011 is high. Therefore most borrowers would find themselves on an unattractive deal by the time we reach the start of the 'teens' in 2013 by going for any tracker or variable rate with a tie-in. This is why most borrowers need to be careful of some deals and choose a short term deal. Try to avoid the lure of the discounted variable mortgage at present; these products hold about the same appeal as a primed mouse trap. If you want to check your options and deal with one of our experts then simply enter the mortgage you require in the box below this article:
