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Mortgage Interest
The interest rate charged on a building society mortgage is a variable one, not fixed as with a bank personal loan, for instance. This means that the rate can be lowered or raised during the term of the mortgage. The rate has to be variable because the rates of interest allowed to society investors are variable. Both rates have to change from time to time to keep them broadly in line with the general level of interest rates in the market.
Setting the rate
Most societies adopt for their basic mortgage rate the rate recommended by the Building Societies Association. But societies are free to charge a lower or higher rate if they choose to do so. Some societies make a practice of charging a rate marginally higher than the recommended rate because they also pay investors a marginally higher rate.
Differential rates
It is now common practice for building societies to charge mortgage interest at what are called 'differential' interest rates, by which is meant that a higher rate is charged for a large mortgage than for a small. Mortgages up to a certain limit are charged at the recommended rate, but progressively larger mortages are charged at progressively higher rates. Two specimen scales are shown below, based on a recommended mortgage rate of 12%.
Society A Society B
Loans up to £13,000 12%
Loans up to £14,999 12%
£13,001 to £15,000 12.5%
£15,001 to £17,000 12.5%
£15,000 to £19,999 12.5%
£17,001 to £19,000 12.75%
Over £19,999 13%
£19,001 to £21,000 13%
£21,001 to £25,000 13.25%
Over £25,000 13.5%
Where a differential rate of interest is charged the higher rate applies to the whole of the loan, not just to the successive slices.
Indemnity Guarantee
The rules of most societies require additional security to be taken for any loan that exceeds a stated proportion, often 80% of the valuation of the property. The additional security usually takes the form of an independent guarantee from an insurance company indemnifying the society against loss in respect of the excess lending over 80%.
The cost of this indemnity has to be met by the borrower, but it is quite modest and is in the form of a single premium, the amount of which can usually be added to the mortgage amount so that it, too, is being borrowed from the society.
The... see: Indemnity Guarantee