Bank of England interest rate cut: Era of interest-free mortgages looms, experts predict – Telegraph
“Many lenders will never have taken into account the prospect of such a drop in rates and will have their lawyers scurrying back to their offices to look at the small print of their mortgage conditions as the prospect of having to pay their borrowers is to awful to contemplate.”
The majority of borrowers with a tracker deal pay the bank rate, plus a percentage on top. But some deals available just over a year ago allowed borrowers to pay the bank rate minus a percentage.
If the bank rate falls much further, these borrowers could be paying negative interest on their mortgage.
Bank of England interest rate cut: Era of interest-free mortgages looms, experts predict – Telegraph.
Tom here -
What? An interest free loan? How would that work?
Let me explain:
If a loan is written at a Bank Rate (say the 1 year T-Bills) minus let’s say 1.25% (purely example) and the rate drops to .75, that means that the loan would have a negative interest rate.
Why won’t that happen in the states?
Virtually all residential mortgages (ARMS) are written with an index plus an amount (typically 2.25 to 2.75%). So if that rate would indeed drop to Zero, the rate on the adjustable rate mortgages would drop to 2.25 or 2.75% (depending on the Index).
Now home equity credit lines are a different story. Most of them are written tied to prime and prime is typically 3% above the Fed Funds Rate. So, even if someone has an equity loan at prime minus 1.5 (VERY RARE) they’d still be at around 1.5%.
In light of that, I don’t think you’ll see anything like that in the United States but it will be interesting. (Pun intended).
If anyone knows someone in the States who has an equity line at prime minus 2 or more, I’d love to hear from you. Those are the ones who could see something close to zero.
Let me know what you think.
