Review dates bring a gamble on rising rates

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The Independent Online

Rises in mortgage interest rates always dominate headlines and strike fear in the hearts of borrowers. But for millions of homebuyers whose loans are set on an annual basis, the effect can be curiously mixed.

Many borrowers "underpaid" on mortgages by up to £100 or more last year. If mortgage interest rates rise in 1995, underpayment could continue for another 12 months.

The anomaly is caused by the various dates chosen by lenders to set interest rates for borrowers whose mortgages are subject to annual review.

In January last year, interest rates, which had stood at 7.99 per cent for many societies over the previous nine months, dropped to an average of 7.64 per cent.

Societies, including Nationwide, Norwich & Peterborough and Yorkshire, which calculate annual payments on 31 December, would not have been able to give borrowers the benefit of the doubt. A similar picture applied at Leeds Permanent, which sets its annual rates on 1 October.

Borrowers with those societies would have been charged interest at the generally prevailing rate, 7.99 per cent. Borrowers with Bradford & Bingley, Clydesdale or National & Provincial have their rates set on 1 January. They would have benefited from the reduction.

Many of Halifax's 1.8 million borrowers would also have benefited. Although the society has a new policy whereby annual rates are set on the anniversary of the start of a mortgage, most existing customers see their new rates set on 1 February.

The new rate stayed fixed until 1 February this year, when it changed to 8.35 per cent. Borrowers benefited, however, by the fact that interest rates went up to 8.1 per cent in October. As a result, Halifax calculates that an interest-only mortgage of £50,000 would have led to "underpayments" of £119.50 during 1994.

A Halifax spokesman said about 70 per cent of its borrowers were on annual review of their loans. Of those, about 900,000 had an annual review in February.

"It's a question of swings and roundabouts. If interest rates rise during the year when an annual rate has been set, then payments will tend to be slightly lower than they should have been. On the other hand, when the opposite happens borrowers pay a little bit more. Over a period of several years it does more or less level out."

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