So how far would you go to get a better deal?
Sunday 26 February 2006
Confused? If you weren't already, you may well be now.
While most homebuyers have to choose the right mortgage deal from a wide selection that includes short-term fixes, discounted variables, trackers, and flexible and offset loans, a band of confident borrowers are going for a still more sophisticated option: a sterling mortgage linked to the interest rate of a different country.
Launched here four and a half years ago, deals of this type still account for only a tiny percentage of the UK market. As with ethical or green mortgages, lack of borrower demand is largely matched by a lack of supply. Just four lenders bother to offer them - West Bromwich, Leeds, Derbyshire and Scarborough building societies - and mainly through broker John Charcol.
The way they work is that your loan is linked to the interest rate of one of just three countries or economic areas: the US, Switzerland and the EU.
More specifically, it is linked to what is called Libor - an acronym for the London inter-bank offer rate. This might sound complex but it is simply the rate of interest at which national banks in different countries lend to each other.
Each country has its own version of Libor that is connected to - but not the same as - its central bank's interest rate.
So the US Libor depends on rates set by the Federal Reserve, and the Euribor (an amalgamation of Euro and Libor) on the European Central Bank.
Libor tends to move in anticipation of what the country's base rate might do. For example, the US base rate currently stands at 4.5 per cent, while US Libor is 4.77 per cent. In broad terms, this means economists are expecting the Federal Reserve rate to rise.
It might seem as if you need a fine grasp of overseas economics before even contemplating this kind of mortgage. But proponents contend that with most deals running for five or 10 years - much longer than most of the deals available domestically - borrowers can afford to be more relaxed.
Ray Boulger at John Charcol points out that, historically, overseas Libor rates have been lower than those here. The idea, therefore, is to let customers benefit from potentially cheaper deals for long spells.
That said, there are short-term fluctuations - and critics contend that these can have a greater impact on borrowers than rate changes in conventional domestic mortgages.
All overseas interest deals track the relevant country's Libor by a certain margin and, critically, their price is calculated on what is known as "three-month Libor" - so any change up or down at this point is reflected in the amount of interest you pay. "Most of the mortgages linked to foreign rates that have been launched in the last few years have been tracking a very low rate [for borrowers], but at a high margin [for the lender]," says James Cotton of the broker London & Country. "The danger is that if the underlying rate rises, borrowers will end up paying much more than with deals that track the Bank of England base rate."
Two years ago, the Federal Reserve rate dived in a bid to keep a stuttering US economy going, hitting 1 per cent in June 2004. However, it has since risen back up to 4.5 per cent.
Until recently, Skipton building society offered a four-year loan that tracked US Libor at 2 per cent above. This was fine when times were good, but the rate rise is now hitting home.
"With US Libor at 4.77 per cent, anyone still on this deal could be paying 6.77 per cent from next month - higher than most lenders' standard variable rates [SVRs]," says Mr Cotton.
And in contrast to SVRs, where borrowers don't have to pay a penalty charge to remortgage away to a cheaper deal, overseas interest mortgages levy early repayment charges as high as 5 per cent.
Today, the cheapest mortgage of this sort is Derbyshire building society's Swiss Franc Libor tracker. For a five-year deal, this is priced at 2.94 per cent above that Libor - giving a current pay rate of 3.99 per cent.
Elsewhere, a US Libor tracker funded by Leeds building society is priced at 3.49 per cent until 30 June this year. From then, the rate is pegged at 0.4 per cent above US Libor.
Nick Gardner at broker Chase de Vere Mortgage Management is unimpressed: "Given that you can get lifetime trackers pegged to UK rates for 4.89 per cent or less, I see little point in linking to an American interest rate in order to get a higher rate on your mortgage."
But Mr Boulger says it's better to take a long-term view. "Although at 4.5 per cent, the Federal Reserve cost of borrowing is currently the same as the UK base rate, it's believed to be nearing the top of a [rate] cycle.
"It spent a long time at around 1 per cent when these mortgages were first launched."
Fees on overseas rate mortgages are comparable with those on standard UK loans.
Given their nature, the biggest take-up of these loans is in the buy-to-let market, adds Mr Boulger. The typical Libor deal is for five years, which means that interest rates are usually low enough in the long term to make them appealing.
Property investors comfortable with juggling several mortgages, he continues, also tend to be more adventurous about non-traditional lending.
'The rate should stay low for years'
Richard Dean, 52, is buying three buy-to-let properties in Tooting Bec, south London.
He has chosen to fund each of them on an interest-only basis using West Bromwich building society's Euribor tracker mortgage.
The deal is 2.3 per cent above Libor for two years, giving a pay rate of 4.6 per cent today, before switching to 2.8 per cent above Libor for a further three years.
"The low initial rate attracted me to the deal - and [the expectation] that it should stay low for five years," says Richard, a writer.
"The adviser assured me that, historically, this had been the case with Euribor.
"With [previous buy-to-lets] I took a short-term discount on a mainstream deal and am now paying a mug's rate. I didn't want that to happen again."
Richard is not concerned about keeping up with the movements of a foreign interest rate. "I've never been a great student of these things," he says. And being tied in for five years doesn't faze him either. "I am not intending to sell in that time so don't see the problem."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Paul Scholes: Manchester City were so good against Liverpool I felt like turning the television off
- 2 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 3 Pamela Anderson rejects ice bucket challenge because of ALS experiments on animals: 'Mice had holes drilled into their skulls'
- 4 Homer Simpson takes the ALS ice bucket challenge because of course he does
- 5 Hello Kitty is not a cat after all
Exclusive: We share blame for creating 'jihad generation', says Muslim strategist
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
- < Previous
- Next >
iJobs Money & Business
Highly Competitive Salary: Austen Lloyd: CITY - An excellent new instruction w...
£500 per day: Harrington Starr: SQL Server Developer SQL, PHP, C#, Real Time,...
£600 per day: Harrington Starr: C#.NET Developer C#, Win Forms, WPF, WCF, MVVM...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony