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Charcol launches “Federal Reserve Mortgage”

Amanda Jarvis

December 17, 2004

Detail include:
– Tracker rate based on the lower US interest rates
– No currency risk – all loans in sterling
– Initial rate is 2.99% to 30/06/05, then US$ 3 month Libor + 1.15% until 30/06/15, currently equivalent to a rate of 3.65%
– Followed by Standard Variable Rate for term, currently 6.74%
– The overall cost for comparison is 4.8% APR

Its initial rate is 2.99% until 30/6/05 and it then tracks US 3 months Libor, which is currently 2.50%, for 10 years. Borrowing is in sterling and so there is no currency risk.

After the initial period to 30/6/05 the interest rate on this mortgage will be US$ 3 month Libor, currently 2.50%*, plus 1.15% until 30/06/15. Based on the current Libor rate this would give a pay rate of 3.65% and the tracker rate will be re-set every 3 months.

Commenting on the deal, Ray Boulger of Charcol said, “The key to evaluating this mortgage is the likely difference between short-term US and UK interest rates over the 10 years of the deal. US$ 3 month Libor has been lower than its UK equivalent for all but 1_ of the last 20 years and it is currently well over 2_ % less (2.50% v 4.86%**). Although the current differential between US and UK rates is likely to reduce over time, this deal nevertheless offers exceptional value for borrowers who want a variable rate mortgage and are prepared to accept early repayment charges for 10 years in exchange for a exceptionally competitive rate.”

Interest on the mortgage is calculated on a daily basis and it is flexible. Borrowers can repay up to 10% of the mortgage per annum without incurring an early repayment charge (ERC) and any overpayments can be utilised to take up to 6 months payment holidays per year if required.

Boulger continues, “In addition, such a low starting rate has the added benefit on a repayment mortgage that the amount of capital repaid in the early years will be significantly greater than normal. A bonus with this mortgage is that because the rate is so low borrowers will have the option of paying their mortgage back much quicker than usual, simply by paying each month what they would have paid on a normal mortgage. They can either set the mortgage up for a shorter term, use the 10% p.a. ERC free overpayment facility, or employ a combination of both.”


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