If have a short-term, fixed-rate mortgage, your monthly repayments could rocket when your special-rate deal ends.
One piece of advice that's always worth heeding is, "Stay out of handcuffs". This goes for the financial type, as well as the Police variety!
I'm always suspicious of financial offers that look too good to be true, because they're sure to have a sting in the tail. For example, take fixed-rate mortgages that offer ultra-low initial interest rates. The only way that a mortgage lender is going to give you a fixed-rate deal that's way below the Bank of England's base rate (currently 4.75%) is if it knows that it'll make its money back somehow.
Take, for example, the 31,000 borrowers who took out fixed-rate mortgages two years ago. In October 2002, one of the cheapest deals was two years fixed at 2.25% with the Portman BS. Customers who plumped for this deal are about to see their repayments rocket and most will be unable to cough up a 7% penalty to switch to a cheaper deal!
For instance, if you'd taken out a £100,000 interest-only mortgage on these terms, your monthly repayments would have been under £188 for the last two years. However, the bad news is that you're locked into the Portman's bog-standard rate for the next five years. Portman's current standard variable rate is 6.74%, which is the everyday rate charged by most big lenders.
So, at 6.74%, your £100,000 mortgage is about to start costing a whopping £562 a month. In other words, your monthly repayments are set to triple. What's more, if you want to escape to a cheaper deal, you'll have to hand over a fine of £7,000 to the Portman. Yikes!
Granted, over two years, this looks like a cracking loan but, over the seven years that you're tied to the Portman, it looks like a pretty raw deal. You may be buying a two-year bargain, but you're buying five years of misery, too! And, given that most people are hopeless at budgeting, the sudden shock of their mortgage repayments tripling overnight will mean heartbreak for many households. Sadly, some borrowers could even see their homes repossessed, because they're not prepared for this rate shock.
I really dislike the way these mortgages are designed and marketed and I wouldn't touch one with a bargepole. So, if you're thinking about taking out a bargain fixed-rate mortgage, make sure you understand what upfront fees you have to pay - and how much you'll be fined if you want to get out early.
More: Find a better Mortgage | The Mortgage Lenders' Latest Trick.
