Interest Rates. Base Rates. Mortgages.

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%”

“2.01% – Best Mortgage Rate Available … Anywhere”

Admittedly, the ads shown above are slightly tongue-in-cheek in the wording used but the rates themselves are VERY close to those being seen by consumers with mortgages.

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.

Consider the recent headline-grabber rate of 2.29% that was withdrawn from the market late March (09). Everybody wanted it – from mainstream residential borrowers to buy-to-let investors with an adverse credit history. Bizarrely, they all thought they could get it judging by the increased enquiries mortgage advisers received for the product.

What very few realised though was this product was a tough one for most people to take advantage of. According to the Council of Mortgage Lenders the average Loan-to-Value in January 2009 was 76%. Put another way, the average deposit or equity in a UK home was 24%. Yet this fabulous, headline-grabbing product required a 40% deposit – almost twice the average available. Furthermore, this mortgage product also required borrowers to have a “squeaky clean” credit profile.

That’s why the initial interest rate was that low. If you had a truly short-term financial “hump” to get over for the coming year AND you could meet the strict lending criteria, then the product was a match made in heaven. For example, on a mortgage of 150,000 and an interest rate of around 4%, you would have been saving more than 210 Pounds every month (or 2,520 Pound for the year). Maybe this product would have suited many women in the UK with mortgages that also wanted to clear a credit card balance rather urgently. According to Abbey Credit Cards, the average credit card balance held by UK women and the saving this mortgage product gave were roughly the same.

Beyond the tantalising headline rate of 2.29% for the first year, however, there is the major interest rate risk to consider for this kind of mortgage. With the Bank of England base rate at an all-time low, what direction logically remains for interest rates over the short to medium term of 1 – 3 years? Of course it would be political suicide to raise rates before a General Election (2010) but what about after that?

True, it’s anybody’s guess when rates will rise again but we do know that lenders are predominantly offering the very lowest rates for the shortest possible timeframes, mostly 2 years or less (such as the one above). If you want a longer timeframe with a fixed-rate, be ready to pay a premium of 1% and more. Lenders, themselves, see considerable risks for the next 2+ years and have hedged their bets by offering variable-rate products in one form or another (e.g. Trackers, Capped-Rate and Standard Variable Rate).

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.