Monday, 23 September 2013

Beware mortgages with built-in increases

Beware of mortgages which look cheap now but get expensive later.

That's the danger in the current splurge of so-called cheap mortgages which could bite back once interest rates and house prices jump higher.

For example, the Post Office is pushing "Another great mortgage rate" today which is 1.98% fixed for two years then a more daunting 4.49%. The later rate is variable, so it's likely to go higher.

And this is only for those who can muster a 25% deposit.

I've got nothing against the Post Office. It is good to see them in the mortgage market and there are worse rates out there - this is, in fact, one of the lowest of its type.

However the next two to three years are a slam dunk as far as interest rates are concerned. Mark Carney at the Bank of England says he wants to keep his base rate down at 0.5% until 2016.

Even if he fails, rates are going to be low for a while.

So the first point is that you need to think about the period after that. A mortgage, after all, is usually a 25 year commitment and most people aren't canny enough to switch providers at the drop of a hat.

There are five year fixed rates, for instance, which are well below 4.49%.

And -- second point -- you should think very carefully about how much you are borrowing at what could turn out to be significantly higher interest rates in the years to come.

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