Farewell to the 0% mortgage rate

It is soon time to bid a fond farewell to one of the strangest offspring of the credit crunch, the 0% mortgage. Welcome back to the real world!

This will be a tearful parting for hundreds of thousands of homeowners, who have come to rely upon the childlike delights of paying zero interest on their mortgage.

Soon they will be abruptly dumped onto a proper, grown-up mortgage, one that actually charges interest for borrowing money.

You've had your fun, welcome back to the real world!

A big fat zero

A couple of years ago, when people still thought Northern Rock had a robust business model, a host of lenders produced two-year tracker deals charging as low as 1.01% below base rate.

Even with base rates at 5.75% these deals were great value, and when rates tumbled to just 0.5%, they were to die for. Bankers were doling out free money. That must have hurt.

And doncha wish you had one, particularly if you had "prudently" locked yourself into a fixed rate instead?

When zero was hero

All good things come to an end, especially if it involves bankers giving money away.

So, all you lucky zero-percenters, I hope you seized this once-in-a-lifetime opportunity to pay down your mortgage and other debts. Because you could soon be joining a less exclusive mortgage club, the four-percent-plussers, where life suddenly becomes a lot more expensive.

It could be worse

How much you pay will depend on your lender. Some zero-percenters will continue to ride their luck, because several former 0% lenders are also offering low SVRs.

It was C&G who offered that dreamy 1.01% below base deal, and its SVR is now a sweet 2.5%.

But it still means the monthly interest on a £100,000 loan will rise from nothing to £208. You poor lambs.

Borrowers with a 0% tracker from Birmingham Midshires will revert to a slightly lower SVR of 2.49%, costing them £207 a month for every £100,000 of mortgage. Bless.

Life is tougher for former Halifax zero-percenters, who now face a 3.5% SVR, or an extra £291 a month for every £100,000.

Borrowers with the Co-operative Bank will pay 4.24%, a mighty £353 a month extra. Now that will hurt.

C'mon, it's still a great deal

Yet these are still excellent rates by historical standards, even the Co-operative Bank SVR.

Given how tight-fisted lenders are with mortgage finance these days, and how the banks are nakedly profiteering by earning vast margins on their book, you will struggle to get a better deal elsewhere.

If you can't afford to pay 4.24% on your mortgage, you shouldn't be buying a property in the first place.

But for those who have been unfortunate enough to lose their jobs as well as their tracker, it could still end in tragedy.

Punished for playing safe

The 0% mortgage is another example of the credit crunch lottery. If you hovered between taking out a fixed rate or a tracker a few years ago, and made the wrong call, you will be down many thousands of pounds.

Instead of paying 0% on your mortgage, you might have spent the last two years paying nearly 7%, or around £600 monthly interest on every £100,000. You must have been seething every time the base rate was hacked lower and lower.

I'm glad it wasn't me.

It is also yet another example of how the credit crunch targets the most vulnerable hardest.

Mortgage brokers typically recommend that borrowers who are stretching their finances should protect themselves from future base rate increases with a fixed rate. This is exactly the category of borrower would have benefited most from a 0% tracker: families or young couples on tight budgets who can only just about afford to make ends meet.

Instead, people like my American friend Jody, who could afford to take their chances with a tracker, struck gold. She blew her windfall on sushi and shoes. Life isn't fair.

One day, all this will be a distant memory

Rock bottom variable rates have been the saving grace of the recession, and the main reason repossessions haven't soared even higher. In the last downturn, interest rates hit double figures, with predictable effects.

But it won't last forever. At some point, base rates will start to rise again, although if we're lucky, not before mid-2010, or even 2011.

Whether you have a fixed, variable or tracker rate mortgage, you should start preparing for that day now. We are all on a race against time, to smash down our debts before they smash us.

This is no time for coasting, especially given the galloping redundancy total.

One key question remains for the lucky zero-percenters, and anybody with a variable rate mortgage. You now have on average 11% more disposable income than a year ago, but what are you doing with it?

Saving it, or having fun disposing of it, like My American Friend Jody? Please, please, please let it be the former.

Don't miss this open goal

When I was discussing the topic of this article with lovemoney.com editor Donna Werbner, she said she suspects many lucky variable rate borrowers have squandered this golden opportunity. Or as she put it:

"Have they been sensible, Harvey? Have they? You know, overpaid and saved and all that?

"No doubt some of them have - hopefully those who read lovemoney.com. But I bet there are many borrowers out there who have been treating themselves to cheap holidays and cheap DVDs and cheap 2-for-1 restaurant deals on the back of all the misery caused by the recession, and then boasting about it all in dinner parties.

"Not that I'm jealous, or anything...."

Tell us the truth

So have you all been good, sensible lovemoney.com readers, or have you gone a little wild with your windfall?

You naughty, wasteful people, you....

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