Flexible or Fixed Interest & An Unusual Offer from Bank..

[GettingOnTheLadder]

Hi,

I´m about to get my first mortgage... (PANIC!?)

The bank offers either a fixed rate of 3.25 % or variable rate starting at 2.65% and being adjusted yearly (never more that 1% increase per year); maximum of 5.30 %. In the worst case scenario we would pay significantly more than with the fixed rate, but what is the probability of this in the current economic climate? It is a 15 year mortgage and may be paid back early.

Secondly, the bank says given our finances they are happy to lend one third of the money as a kind of standard loan so we avoid paying a lot of tax to the government (v high taxes where we are - abroad) The bank however would still have first right of purchase to the house in event of default.

I´d appreciate your reactions. I have no idea what to expect and the language barrier does not aid comprehension.

Any comments or advice!? Thanks.

You should really talk to a financial advisor or mortgage broker in the country in which you are. That whole 'loan to dodge tax but we keep your house if it goes wrong' thing sounds decidedly odd from a UK perspective.

On the question of the interest rate, how long is the fixed rate fixed for? What is the penalty for early redemption? How much can you pay back without penalty? What rate applies after the fixed rate period? If you took the variable rate & it went up to 3.65% after one year, could you still meet the payments or would it be a train-smash?

Fixed rates provide peace of mind and enable long-term budgeting but are generally a little more expensive. Variable rates are usually cheaper but base-rate fluctuations can quickly make them expensive. Take some professional advice and get some alternatives before you finally decide.

Firstly you are not in the UK so a lot will depend on the government of your country's attitude to interest rates. This sounds a lot more complicated than a UK mortgage situation with taxes etc. so really you need to get some good local advice.

Thanks for your response... I´ve no idea if there even is such as thing as a mortgage broker here, so something I should definitely investigate!

The fixed rate of 3.25 % is fixed for the entire mortgage. Is that good?

Tax evasion is a national sport here and can only be completely legal. It´s offered by an internationally known huge bank. I understood they gave us this unusual offer (and excellent interest rate???) because of our reliable savings history and income. The bank (our normal bank) was quite confident we wouldn´t get a better deal elsewhere.

To clarify on the "loan" part of the mortgage.. Officially it would be classed as a loan and not mortgage (so we avoid tax) but the bank would have first option to buy should we default on the mortgage. (Presumably they would automatically own the rest of the house anyway!)

The variable option has a no penalty option if we "overpay", but we can only do so once a year. The fixed interest option means we could overpay but would be fined approx 50 quid for the privelege.

What do you think? We could make the payments if interest rates went up but I really wouldn´t be happy about it!

Just seen you post Liz, thanks! Yes, I will see if there are any independent advisors etc first! Are the interest rates higher here than in UK?

All banks tell you their offer is the best there is. Mortgage brokers' job is to hunt around for you and find out if that's true. In UK terms a 3.25% fixed rate deal for 15 years (?) would be a very good one.

What you are being offered is a fixed rate, vs a collar rate. The rates quoted are actually quite cheap if you look at the long term historic cost of money. Question is, do you want certainty or can you live with a floating rate (between barriers). The bank makes lots of money out of you either way. Check the fine print - can you overpay, exit penalties etc. If it's a good bank and they are offering a tax 'efficient' scheme don't worry about it as you can sue them if it goes wrong. We've seen some very fruity schemes over the years. The HMRC catches up with them eventually, but generally not on a retrospective basis. Tax Avoidance is legal - evasion is illegal.

What are the currencies involved?

Good luck!

Honestly banking