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News: What a difference a rate makes

Fri, 30 Nov 07

The majority of UK homeowners don’t understand the impact of interest rates...

Research from Nationwide Building Society reveals that 75% of people in the UK don't understand the monetary value a 1% difference in mortgage rates can make.

A 1% difference in rates on a five year fixed rate mortgage deal could be worth over £4,000*. When given details of two five year mortgage deals to compare, the largest group of respondents (28%) said they thought the difference on a £120,000 mortgage with an interest rate at 5.6% compared to a rate of 6.6% would be between £500 and £2000. Another 23% said they had no idea at all. Only 25% of people correctly identified that the difference could be £4,000.

The research also showed that:

  • Men are more mortgage savvy than women. 33% of men answered correctly compared to less than a fifth of women (18%);
  • Experience counts! 31% of those aged 55-64 guessed correctly the true value compared to just 16% of those aged 18-24;
  • The South-East, Midlands and Scotland had the highest regional score. 28% percent of people in these regions knew the difference compared to their counterparts in Wales and the South West where only one in five people (19%) were right.

If by shopping around, a consumer finds a mortgage deals that saved £4,000, this could cover the costs of:

  • The majority of a household's annual council tax or utility bills: an extra £800 a year would cover a significant proportion of an average £1,100 a year council tax bill or £1,200 a year utility bills;
  • £65 extra a month towards grocery shopping;
  • £800 a year towards mortgage overpayments;
  • An extra holiday a year.

Matthew Carter, Nationwide Building Society's divisional director for mortgages, said: "People's lives are busier than ever in the run up to the festive season and, as a result, they may be less inclined to shop around for the best deal. The temptation may be to take a slightly higher rate as an easier, less hassle option. But, as our research shows, most people don't understand the impact that just a 1% difference can make, meaning they could be wasting thousands of pounds.

"We therefore urge borrowers to make time to shop around and compare the total costs over the life of a deal before making a final decision. After all, a £4,000 plus saving on a 5 year deal for a couple of hours of work is a pretty good return!"

Example of cost savings on 5 year fixed rate mortgages:

Remortgage, switcher and additional borrowing:

Lender

Rate

Reservation fee

Monthly payment

Difference in rate to Nationwide

Saving with Nationwide over 5 year deal period

Nationwide

5.63%

£499

£754

-

-

NatWest

6.54%

£699

£806

+ 0.91%

£3,151

Halifax

6.89%

£499

£827

+ 1.26%

£4,393

Northern Rock

7.29%

£495

£851

+ 1.66%

£5,832

Rates correct as at 23.11.2007

Home mover:

Lender

Rate

Reservation fee

Monthly payment

Difference in rate to Nationwide

Saving with Nationwide over 5 year deal period

Nationwide

5.63%

£499

£737

-

-

HSBC

6.29%

£499

£785

+ 0.66%

£2,864

Halifax

6.69%

£499

£814

+ 1.06%

£4,642

Northern Rock

7.29%

£495

£860

+ 1.66%

£7,363


Rates correct as at 23.11.2007

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