Introduction
The concept of a mortgage is simple: First you borrow a large lump sum of money
and then pay it back over a long period of time, with the property you are using
the money to buy usually acting as security against you defaulting on the loan.
This simple concept is complicated by the existence of a vast number of different
mortgages on the market from hundreds of different lenders. Some may be almost identical
to a whole host of others, while many will have near-unique features that only appeal
to a very specialised group of customers.
Perhaps the most important feature of any mortgage is the interest rate that you
pay on the money that has been lent to you - it's certainly the first thing that
most people look at when assessing the suitability of any given mortgage product.
The prevailing level of interest charged by lenders depends largely on the Bank
of England base rate at that particular time. However, aside from helping to determine
lending rates, the Bank of England base rate is actively used by the Governor of
the Bank of England and the Monetary Policy Committee to manage the economy, meaning
that there are fairly frequent changes in interest rate, with the knock on effect
that mortgage interest rates can also vary considerably from month to month or year
to year.
Even with the fluctuations that occur, if all lending rates tracked the base rate,
choosing a mortgage would be a lot simpler. There are some simple deals around,
which are very easy to understand. But as we, the customer get more and more sophisticated,
so too does the level of complexity that lenders introduce to their products.
As a result, picking your way through the complex range of discounts, fixed rates,
caps, collars, deferred interest and variable rates can be incredibly confusing.
For the inexperienced, it can be very hard to tell a dog deal from a good one. There
are a lot of false friends amongst mortgage products - seemingly fantastic short-term
deals may not be bargain at all in the longer term.