The mortgage price war is heating up as lenders try to win your business, and now HSBC has launched a home loan with an interest rate of just 0.99%. It’s the lowest the bank has ever offered, and the lowest currently advertised by a lender, so should you consider applying? Here are some things to consider.
The rate is very low …
Even at a point where the Bank of England base rate stands at just 0.5%, a mortgage rate of just 0.99% looks low. Other lenders may offer lower rates to very wealthy clients with complicated financial circ*mstances, but in the mainstream market this is the lowest interest rate on offer. The maximum amount you can borrow is £500,000 and you can move the loan to a new property. On a £100,000 mortgage arranged over 25 years, the rate makes for initial monthly repayments of just £380.
But it isn’t fixed
If you are concerned about interest rates going up over the next two years then this might not be the mortgage for you. The rate is pegged to HSBC’s standard variable rate (SVR), offering a discount off it for two years. The discount is 2.95% throughout the period, but the SVR, which is currently 3.94%, is variable and subject to move at the lender’s discretion. It is unlikely to move unless the Bank of England base rate does, but if that starts to creep up, the SVR is likely to follow and with it the amount you pay.
The latest comments from the Bank of England suggest that interest rates are unlikely to rise before the middle of 2015, in which case the rate on HSBC’s deal will stay low. But if it is hard-and-fast security you are after, then this deal is not for you.
Fixed-rate mortgages are currently being priced downwards, so you may want to consider one of them. Over two years, there are fixed-rate home loans available from HSBC, at 1.49% on mortgages up to 60% loan to value (LTV) or from Chelsea building society at 1.55% on up to 65% LTV. Just two 0.25% interest rate rises could bring the rate you are paying to that level, while three would surpass it. Over five years the margin is bigger, with the lowest rates around 2.85% from First Direct and Chelsea building society.
In the short term your payments will be higher, but if you fear that in two years’ time new deals will cost much more, it might be worth paying the extra to lock in now.
The fee is big
HSBC is charging a £1,999, non-refundable, booking fee on the mortgage. Not a record, but still pretty hefty. In contrast, Norwich and Peterborough building society is charging £345 on its two-year tracker mortgage, with a starting rate of 1.44%.
The Norwich and Peterborough deal is definitely going to go up if the base rate rises as it is pegged to it, but if rates do not rise over the two year period it will be cheaper than HSBC’s loan on all mortgages up to £300,000, according Andrew Hagger of Moneycomms.co.uk. He has crunched the numbers and worked out the total cost over the first two years of the loan. On a £150,000 mortgage, HSBC customers will pay £15,559 over two years, against £14,649 at N&P – a saving of £910, while on a £250,000 mortgage the N&P works out £406 cheaper.
Loans with low interest rates and big fees are typically better value if you are borrowing a lot than if you are borrowing a little, as on small mortgages the lower monthly cost will not offset the fee.
You may be trying to get your monthly repayments down so they are more affordable. Bear in mind that even if this is the case, the lender now has to stress-test your borrowing to make sure you can still afford repayments if interest rates shoot up. Taking a low-rate loan is not a way to get to borrow more money.
You need a large deposit
HSBC’s sub-1% mortgage is only available up to 60% LTV, which means you need a deposit, or equity in your property, of 40%. That will rule out a lot of borrowers. Norwich and Peterborough is slightly more generous on its tracker deal, offering up to 65%, but generally as the amount you can put down falls, rates rise. HSBC’s comparable discount deal for 90% mortgages starts at 2.89%, a 1.05% discount off its SVR, while Yorkshire Bank has a two-year fix at 3.39% and a five-year fix at 4.19%.
It is only available direct or through certain brokers
The bank has only just made its mortgages available through brokers, and is currently using the network run by Countrywide Mortgage Services. Other brokers won’t be able to help you apply for the loan and you will have to go direct.
But you can overpay
The rate is low and you can overpay up to 20% of your mortgage each month, meaning that if you can afford to pay extra you can clear your loan early. Kevin Mountford, head of banking at MoneySuperMarket, says that this makes it a great offer. He notes the large booking fee and that the rate is variable. “Overall however, this product offers customers a good deal, and while many will prefer the security of fixed-rate products, the discounted rate enables borrowers to benefit from much lower costs than the market-leading two-year fixed-rate alternative,” he says.
