Get A Sub-5% Mortgage
Discounted rates look extremely competitive compared to fixed rate deals as long as you can stomach the current rate insecurity.
Most potential buyers or remortgagors have now accepted that they'll struggle to get a mortgage rate of below 6% in the current environment, let alone below 5%. But that's exactly what HSBC has recently launched. Its two-year discounted rate mortgage is just 4.99%, available direct from the bank to those with a 20% deposit or more.
What's the catch?
Well, the deal comes with a whopping fee of £2,499 -- enough to put off those with very small mortgages (where the fee can be just as important as the rate over a two-year period) -- and it is only available up to £250,000, so is not an option for those with really large loans who would benefit from it the most. But for mortgages nudging £250,000 it could be one to consider.
And even though the HSBC deal is the only discounted variable rate under 5% there are other similar products that look extremely competitive, especially when compared to the equivalent best buy fixed rates, in terms of interest rate and upfront fees.
|Two Year Fixed Rates|
1. First Direct
for 2 years
|2. Skipton BS|
|3. Chelsea BS|
|4. Mansfield BS|
for 2 years
|5. Direct Line|
|6. Cheshire BS|
for 2 years
|2. Barnsley BS|
for 2 years
|3. Mansfield BS|
for 3 years
|4. Leeds BS|
for 3 years
|5. Nottingham BS|
for 5 years
Source: Moneyfacts 10th July
But what if you cannot get a best buy deal, either because you don't have the right level of deposit or you want to pay a smaller fee? The fact is that they are not always available to all borrowers.
Well, according to Moneyfacts the average discounted rate is also considerably lower than the average fixed rate, and they come with lower fees.
Average discounted variable rate: 6.41%
Average fee: £795
Average fixed rate: 7.04%
Average fee: £938
The pros and cons
Discounted mortgages may be currently cheaper than fixed rates but fixes are still proving more popular with homeowners. In May, 66% of borrowers opted for a fixed rate mortgage according to the Council of Mortgage Lenders - up 6% from the previous month.
A major reason for this is fear about interest rate increases, which has been building since the Bank of England had to write to the Chancellor last month explaining why inflation had bust the 3% mark by a considerable margin.
There is a school of thought (not shared by myself) that the Bank of England will have to put up interest rates, and this would increase all variable and tracker mortgages but not, of course, fixed rates. So it's understandable that people want to have security of payment and know they are protected against increases in their monthly mortgage repayments.
But there is the flip side. The Bank of England held rates at 5% this week and the tide of opinion is beginning to turn again. Some economists (and me) believe that rates will continue unchanged or even be cut. If they do go down, a discounted variable rate would prove an even better deal as they tend to move up and down in line with the Bank of England Base Rate. Here's an example to illustrate the potential gains.
A borrower taking out a £100,000 repayment mortgage (over 25 years) on the average two-year discounted rate of 6.41% would face monthly repayments of £1,339
If their rate decreased by 0.25% to 6.16% monthly repayments would fall to £1,308
If their rate increased by 0.25% to 6.66% monthly repayments would increase to £1,370
However, the average two-year fixed rate of 7.04% is still higher, and would result in fixed monthly repayments of £1,418
Although lenders can choose not to pass on a cut in Base Rate to their variable rate borrowers, competition usually ensures that many do, even in this unusual mortgage market. Those on a fixed rate will feel no benefit whatsoever if rates fall and could be left paying over the odds for the period they are tied into the deal. Of course, this is acceptable to those who put security of payment first.
But discounted mortgages are extremely attractive in the current environment and suitable for people who could afford an increase in payment-- for example remortgagors who are not stretching their budget and are happy to take the risk.
Another option is a discounted tracker mortgage which works like a discounted variable except the reversionary rate (that you move onto at the end of your deal period) is a tracker, not a standard variable rate. In essence, this means your pay rate moves at a set margin and lenders have to pass on any rate cuts, or increases, usually within a month of the change in Base Rate.
Whether it's a tracker or a variable, rates that can fluctuate are sometimes seen as higher risk, and they are not for everyone. But if you are willing and can afford to take a chance on rates, I think you should ditch the fix and get yourself a discount.
> You could get helpful advice on what mortgage is right for you from The Motley Fool Mortgage Service