Recently many parts of England have been affected by flooding. Many people have had to be evacuated from their homes.
I was watching the news the other day where they did a report on some of the afflicted returning to their homes and surveying the damage. I honestly felt for these people as pretty much all their possessions were trashed.
In one of the areas, they’d previously had a major flood before. Apparently, some of the residents had been told that such a flood was a once in a hundred years event and since they’d had one already they cancelled their insurance thinking that it was too rare to happen again. Ignoring the possibility that the climate is changing or that the odds were incorrect in the first place, they’ve been looking at it all wrong. Its not really how likely it is to happen, its how much damage it will do if it does.
I bet they cancelled the insurance because the premiums went up. The thing is though, that the premium will only go up if there is increased risk i.e. the chance of the event happening has increased or the cost of fixing it has increased. To me, this means that your need for insurance is greater not less.
The lesson for everyone should be that if you live in a floodplain you need insurance against catastrophic floods. Anything catastrophic that has a small chance of happening probably needs to be insured against.
The amount of money that you eventually pay back on your mortgage is determined largely by the interest rates (its alsoÂ influenced by whether you use a repayment or an interest only mortgage)Â . There are several different ways in which the level of interest might be set on a mortgage.
ThisÂ the mortgage companies plain vanillaÂ option.Â The interest rate on the mortgage varies on the whim of the mortgage company. Usually it goes up when the Bank of England base rate goes up, and goes down when the Bank of England base rate goes down, but it doesn’t have to and there is often a lag – particularly if the base rate goes down.
This is a mortgage that explicitly tracks the Bank of England base rate, moving up or down in step. It is usually marketed at a certain percentage above or below the base rate, and may be offered for a fixed period of time (then reverting to a variable mortgage) or for the life of the mortgage.
This is quite a simple one. The interest rate on the mortgage is fixed for a set period of time. Fixes that are available range from 6 months to 25 years. Of the 2043 different fixed mortgage products that I found on moneybackmortgages, though 1986 were for terms of about 5 years or less – the market for a short term fix is very competitive in the UK, but not at all for a long term fix. There isÂ generally a penalty for repaying the mortgage during the fixed period and sometimes afterwards. Once the fixed period ends the mortgage usually reverts to a variable one, but occasionally to a tracker.
This is simply the mortgage companies variable rate with a discount on the interest rate. So if the variable rate is say 6.99%, the discount rate might be 2.99% (a 3% discount). If the variable rate increases, say to 7.5%, then the discount rate increases to 4.5%.
Capped and/or collared
A mortgage is capped if the interest rate can rise but not above a certain level. It is collared if it can fall below a certain level. For example theÂ mortgage may be offered at 6%, capped at 7% and collared at 5.25%. This means that the interest rate can vary at the will of the mortgage company, but will never go above 7% or below 5.25%. Mortgages are usually capped and/or collared for a fixed period of time and then revert to the standard variable rate.
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