Far too many home owners are being tempted by the idea of getting a cheap mortgage. First time buyers are especially vulnerable, because they are so eager to get a house by giving as little a deposit as possible. However, experts have warned these people that many of the cheap mortgages they are signing up for are not what they seem to be. These so called discount mortgages will actually lead people to pay back a lot more than they expect. Here is an overview of some pitfalls that are generally associated with these cheap mortgages.
Discounted Variable Mortgages
The cheap mortgages being dangled out by banks and building societies are known as discounted variable mortgages. These mortgages have an interest rate that is far lower than the standard variable rate the lender would normally charge. However, these companies have the ability to change the standard variable rate on the mortgage at any time they want. This means that they may offer a young couple a mortgage at 5% interest rate, only to raise that amount to 10% or 15% whenever they want.
For example, the 5,000 or so borrowers who have taken out a mortgage through ING Direct will see the interest rate on their mortgage go up from 3.5% to 4%. This increase would result in the average monthly payment change from 750 pounds to roughly 400 pounds. This is an increase of about 50 pounds a month, and that is just the start.
The number of people who sign up for these mortgages is in the millions, with companies such as Halifax, Yorkshire Bank, Bank of Ireland, and Co-Op offering discounted variable mortgages. Each of these companies has been slowly increasing the rates on the borrowed amounts, and will continue to do so for years to come.
Nationwide, an institution that often lends at discounted variable rates, used to have a SVR that was at 2.5%. This figure was costing the bank up to 750 million in a year. As a result, they made a decision to raise their SVR to 4%, which was far more than the current Bank Rate in the UK. In the past, lenders would always have a correlation between their SVR and the current bank rate. However, the crisis with the Eurozone, and other European economic troubles, have lead to them changing their minds.
Increase in Discount Borrowers
While institutions continue to offer these discounted mortgages, the number of people signing up for them has been steadily increasing. In 2009 there were only 3% of borrowers who were taking on this type of mortgage. By 2012 that number had risen to 8%,and will only continue to rise. Borrowers are tempted by the low initial offer, and do not spend much time thinking about what future increases could mean.
If you are serious about buying a home for the long term, it is much better to get a reputable deal. Getting a temporary discount, only to see that amount rise as much as the lender sees fit, is not a good idea. It will throw of your budget in future years, and could lead to you having to default on your mortgage.