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Best rate mortgage traps to watch

Obtaining the best rate on a mortgage is not simply a matter of looking for the terminology ‘best rate’ in the marketing information. Unfortunately, there are often some factors within the terms and conditions that make best rate mortgages anything but, in certain circumstances.

For example, the best rate may refer to an initial fixed or discounted period of around two to three years; after this initial period, the rate is likely to become a lot less competitive for the remainder of the mortgage term. Of course, this is only likely to be an issue if it is combined with a repayment penalty if the borrower leaves to join another lender. With a best rate mortgage that is set at a discount for a certain period of time, it is vital that the borrower remains vigilant and aware of the market so that they can change as soon as the original deal ends.

Advertised best rates on a mortgage may not be that easy to obtain
Another best rate issue that can arise is that the rate advertised is only available to those who meet certain criteria such as having an excellent credit score or are first time buyers. Anyone who does not fit into those criteria may find themselves having to opt for a different rate that may not be as favourable. This technique is used by some lenders to entice potential borrowers into entering into a discussion with the lender in order to encourage them to take up a non best rate mortgage.

With rising house prices, it is common for borrowers to consider the lender that is prepared to lend them the largest percentage of the value of the property as the best rate. For example, some lenders will offer up to 125% of the value of the property, particularly to first time buyers and will advertise this as the best rate available for this type of mortgage.

Whilst being able to borrow in excess of the value of the house may be vital to a first time buyer who will require extra cash to purchase furniture or to carry out necessary works to the property, this can be a dangerous offering from lenders. In reality, most of these types of loan are structured as 95% loans against the property in traditional mortgage style, and a 30% unsecured loan for the balance.

By borrowing such a large amount, borrowers are likely to find themselves in a position where the amount of outstanding loan is far in excess of the market value of the property. Under the structure mentioned above, if the property was sold, the borrower would still have the unsecured element of the loan to cover.

It is also worth bearing in mind that the lender will simply tell the borrower the combined rate of the mortgage and unsecured element, whereas it may be more financially prudent to take out a mortgage of 95% and then look to obtain an entirely separate unsecured loan, possibly even with the same provider.

Summary
Best rate mortgages are a minefield. Not only does a borrower have to deal with the multiple different ways of measuring the best rate, but it is also important to remember that what is the best rate for one borrower may not be for another borrower, depending on personal circumstances.

Always make sure that the best rate mortgage you are considering fits in with your individual requirements. When doing this it can be particularly helpful to enlist the assistance of a mortgage comparison website or a mortgage broker. When it comes to selecting the best rate mortgages on offer, there is so much more to the process than meets the eye!