"Any society that would give up a little liberty to gain a little security will deserve neither and lose both." ~ Benjamin Franklin

Interest Rates and Housing

>> Tuesday, March 25, 2008

I tend to read a lot of news. Not all of it is based here in the US because, believe it or not, I can often get US news with less bias from the UK or Scotland.

I noticed the other day that, though the UK is undergoing a housing slump and people are forfeiting their homes, the government didn’t cut interest rates as was anticipated. Very smart. For one thing it keeps the British pound strong (maybe if our government didn’t cut interest rates to “save” everyone from themselves we wouldn’t have such a weak dollar).

Another thing I saw was that people over there are drawn something called a Tracker Mortgage because there is anticipation of interest rate cuts. Now this was something I hadn’t heard of before, so I had to investigate.

So here's what I found:

The tracker mortgage differs from the Standard Variable Rate (STV) in that the
interest rate is directly tied to the Bank of England base rate, and does not
follow the lender’s rate, which would always be higher. The incentive,
particularly to the first time buyer, is that the margin is set to a maximum of
only 1% or 2% above the Bank of England base rate. And in some extraordinary
cases it may even be set below the rate. This means that repayments during the
life of the tracker offer, (usually from 2 to 5 years), are invariably cheaper
than with other standard mortgages.

Ok, that's all fine and dandy, but here's the kicker:
But even here, there is always a possibility of the Bank of England base rate
rising exceptionally, and in these circumstances the borrower would not be
protected against spiralling costs.

Now, honestly, I don't forsee interest rates rising all that much- anywhere- any time soon. But if it did... Well, I just wonder how many people are reading their mortgage agreements...


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