With interest rates so low and the possibility of imminent increases, mortgage borrowers are looking to lock-in to the low rates for a few years. But, lenders know this and they also know rates are likely to rise in the New Year. What we are now seeing are mortgage deals with increasing 'tie-in' periods where penalties are charged if you move away from the lender within that period. These penalties can be as high as 8% for as long as six years. E xamples are as follows: Lender 1 - 2.49% fixed for 2 years. Penalty of 8% in year 2. Lender 2 - 1.19%, then 1.99% on top of base rate until the end of 2005. Penalties of 7% in years 1, 2 and 3. 6% in year 4, 4% in year 5 and 2% in year 6. Lender 3 - 1.25% fixed for 2 years. Penalty of 6% reducing over 6 years.
Our View
It is vital that you check the small print when opting for a new or re-mortgage. You might think that the interest rate is fabulous but what happens if you need (or want) to get out of the mortgage? You must look at the package you are being offered, not just the rate. In terms of future problems, a long tie-in could make you financially worse off. For example, if you were offered one of the 2-year fixed rates. For the first two years you would generally pay lower interest than people not on these fixed rates, definitely less than those just on standard variable rates. However, at the end of the 2 years you have another 4 years before you can get out of the mortgage without penalties. Our guess is that most (if not all) of those 4 years will be spent on the lenders standard variable rate and not competitive at all. Borrowers would probably be better off opting for a slightly higher rate with no tie-ins. That way, the mortgage can be looked at again in 2 or 3 years time, re-mortgaged onto another favourable rate and without any penalties.