With interest rates so low, many people are taking the opportunity to re-mortgage their homes, either to release equity or just to get a lower rate of intererst to bring payments down. What many people do not understand is that with low interest rates can come a nasty sting in the tail, if they haven't read the small print.
Many lenders are offering exceptionally low rates of interest which could be fixed or discounted for a few years. But, after the two years the interest rate generally reverts to the lender's standard variable rate which, in the majority of cases, will be higher. For example, you might be offered a rate of 3.5% fixed for 2 years but reverting to the standard variable rate of around 5% after that time.
Obviously, mortgage lenders are in business to make money. With rates as low as this they need to make sure they cover their costs. To do this they include redemption penalties in their mortgage offers. For example, you will be offered the rate of 3.5% fixed for 2 years, but, you will then be expected to stay on the standard variable rate for a further 3 years. If you don't, there will be a lump sum penalty to pay, equal to a percentage of the amount you borrowed. Depending on the lender this could be 1%, 2% or 5% in some cases.
Our View
Headline, low rate mortgages are there for one reason and that is to attract new business to the lender. Once they have you they want to lock you in by charging penalties if you break the contract conditions. Whilst all the redemption penalty details will be included in a mortgage offer, people generally do not understand the real implications and often get a shock if they try to re-mortgage away from the current lender, within the redemption period. It is generally the case that other lenders offering a slightly higher interest rates will not have such long or penalising redemption periods.
Always check the terms carefully and look at the worst case scenario. You might be better opting for a higher rate with no tie-in or redemption period.
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