Fixed Rate

[Gavin]

This is a great thread and something I have been long worried about.

Working in banking, you can see how the fixed rates are calculated. The real issue here is that you have to pay for that discount in the end, of course NOTHING is free.

So you think the mortgage company are doing you a favour, to 'get you started', but all you are really doing is borrowing from your own future even more!

If the base rate was 3.5% and the normal lenders profit margin was 1% the SVR would have been 4.5% last October.

If the mortagor gives you a discount to 2.5% he has given up 2% in the short term, which he will claw back one way or another in the long term, hence the high redemption costs. The high SVR after the discount will also reflect this.

Its much easier to see with cash back deals, because thats a finite figure, not hidden in rates. I got 11 grand cash back when I bought my last property, I knew that somehow I would be paying this back with interest.

This made sense to me personally because I received a mortgage subsidy from my employer, which meant I would never pay a rate higher than 5%, my employer would always pay the difference. If I had taken a discounted rate, my employer would have simply not paid me the subsidy.

I knew of course that at some point or over time I would have pay even higher rates, no problem if you have a subsidy, my main point here is that even amongst my co-workers who are all supposed to be financially literate, no one else had worked that out.

They took discounted deals, meaning they didn't actually win, their employer did. This leads me to beleive that people are not as bright as you think.

Another example is a co-worker who started his first BTL last year. When I brought this subject up, he squirmed and confessed he wasn't sure whether he was on a fixed rate or a floating rate, and didn't know what interest rate he was paying!

People will have a big shock when the discount/fix runs out, and considering house prices were already above the long term average 2 years ago, I would not be surprised if the timebomb was very close, because people in London started to stretch themselves from 2001, would that explain the stagnation in London since? The virus is waiting to pounce?