Business life: My finance news blog

A Bush administration plan to help financially stretched US homeowners keep their homes calls for freezing interest rates on subprime mortgages for five years, news reports said Wednesday. President George W Bush was expected to unveil the plan Thursday as the US housing market slump enters a third year, slowing economic growth in the buildup to the November 2008 presidential election.

Rising mortgage defaults have rocked financial markets, caused billion of dollars in losses on securities backed by the home loans and pushed the crisis high onto the politcal agenda.

The plan proposes freezing interest rates on some subprime loans for five years and would widen the options for state and local governments to fund the refinancing of troubled mortgages, the Wall Street Journal reported.

Subprime loans, promoted by financial companies as a way for people with weak credit to buy homes, start out with low interest rates that rise after the first few years - the reason many homeowners are now struggling.

The Bush administration has negotiated with mortgage lenders and investors over ways to reverse the rise in home foreclosures, while avoiding a government bailout of investors who lost money in the crisis.

More than 30 per cent of subprime mortgage holders are behind on their payments, and Credit Suisse analysts say 775,000 homes with more than 143 billion dollars of mortgage debt will go into foreclosure in the next two years, Bloomberg News reported cash advance loans. Nearly twice as many US homes were foreclosed in October compared to a year earlier.

Sorse

New research has suggested that people don’t understand the value of a one per cent difference in mortgage rates.

According to Nationwide Building Society, a one per cent difference in rates on a five-year fixed rate mortgage could be worth over ?4,000.

But when presented with the details of two five-year mortgage deals, 28 per cent of respondents said they thought the difference on a ?120,000 mortgage with an interest rate at 5.6 per cent compared to 6.6 per cent would be between ?500 and ?2,000.

A total of 23 per cent had no idea at all while 25 per cent were able to identify the correct difference.

When it comes to mortgages, men have the edge over women - 33 per cent of men answered correctly compared to 18 per cent of women.

Older age groups also did better, 31 per cent of 55 to 64-year-olds guessed correctly while 16 per cent of 18 to 24-year-olds were right.

Matthew Carter, Nationwide Building Society’s divisional director for mortgages, said: “People’s lives are busier than ever in the run up to the festive season and, as a result, they may be less inclined to shop around for the best deal.

“The temptation may be to take a slightly higher rate as an easier, less hassle option freecreditscore. But, as our research shows, most people don’t understand the impact that just a one per cent difference can make, meaning they could be wasting thousands of pounds.”

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