The new mortgage starts with a fixed rate of 3.25% to 1/4/03 and then for 7 years from that date will track US$ 3 months LIBOR with a margin of 1.35%. US$ 3 month LIBOR is currently 1.84%*, indicating a pay rate of 3.19%, even lower than the initial fixed rate**. The tracker rate will be re-set every 3 months.
This mortgage is flexible - borrowers can repay penalty free up to 5% p.a. of the mortgage and any such overpayments can be utilised to allow up to 6 months payment holidays per year if required.
Commenting on the deal, Ray Boulger of Charcol said, "The key to evaluating this mortgage is to consider what the average differential is likely to be between short term US and UK interest rates over the 7 years of the deal. The cheapest normal UK tracker mortgage for 7 years is at Bank Base + 0.55%, i.e. a current pay rate of 4.55%. The initial indicated tracker rate for the Federal Reserve Mortgage, based on today's LIBOR rate, is 1.36% lower than this at 3.19%. Thus the average differential between short term UK and US interest rates over the next 7 years would have to narrow by as much as 1.36% for this mortgage to become uncompetitive.
"The initial exceptionally competitive starting rate of 3.25% and the subsequent tracker margin of 1.35% over US$ 3 month LIBOR means that despite the mortgage being linked to US rates anyone taking this mortgage will have a much cheaper mortgage rate than most US mortgage borrowers!"
