Welcome to our mortgage interest rate viewpoint pages, where we present information and opinion on interest rates and the typical economic factors affecting your mortgage payments.
Typically your mortgage lenders interest rate is often anywhere from 0.5% to 1.5% above the Bank of England (BoE) Interest Rate. So when you are quoted a mortgage interest rate which refers to the 'base rate', it is the Lenders base rate that is quoted, and not the BoE interest rate. The Mortgage Lender determines their base rate based on how much they have to pay to borrow money compared to how much gross profit margin they wish to add. In the current 'credit crunch' climate, this differential between lenders rates and BoE rates is increasing (as high as 2%) for the simple fact that if lending banks can't borrow money from other banks, the only way to raise funds to is obtain more money from existing customers. This means that even when the BoE interest rate is reduced, lenders may not pass all this reduction on to borrowers, but will no doubt swiftly cut savings rates to savers.
The difference between the Lenders Base Rate and the BoE will be the working capital the Lender generates out of which they will take whatever profit margin the see fit. The odd quarter or half a percent profit margin doesn't sound very large but when you're lending £billions per year, it can generate a lot of extra money!
Occasionally (but very unlikely in the current climate) a Lender will offer mortgage rates which are less than the BoE Interest Rate and less than the rate they can borrow at. Be assured that with most lenders this is only temporary to attract new customers! The lender is effectively giving up short term profit in order to gain new long term customers.
So, often the lender offers great 2 and 3 year type deals to get new customers, but they expect to recover lost profits after the initial discount period is over. Lenders will often lock customers into a mortgage using expensive exit charges, or by increasing interest rates a little more than their standard rate, once a discount period is over. For this reason lenders will be unlikely to actively inform existing customers of their very best deals, because they want you around long enough on the higher interest rate for them to make their profit.
Lenders also get customers to pay for the 'privilege' of receiving preferential rates by introducing an arrangement fee. Often when you take this into account over the discounted or fixed period, you may find that all the advantages of low interest rates have been lost through arrangement fees anyway.
It's up to you to find out what's going on in the mortgage market, but if this all seems too daunting, then speak to a mortgage adviser who can help cut through all the 'noise' to find you the best deal for your circumstances.
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