Mortgage rates with strings attached
If you get one of these current accounts, you could get access to better mortgage deals. But is it worth it?
We all want the best mortgage deal available and we particularly like to think we’ve got a special or exclusive offer. Whether you are after the cheapest rate or the lowest fee it’s good to know you have got the best deal you can.
But when you see a deal advertised at a juicy rate it can be disheartening to find that you have to jump through hoops to get it, or it is simply not available to you.
And this is becoming more and more common, as lenders look for ways to reduce their lending risk and control more of your financial services. There have always been mortgage deals available that come with strings attached, but the last year has seen the number of these deals increase.
Types of tie-ins
For example, HSBC recently launched a best buy discount mortgage which received a lot of press coverage. It’s the lowest rate on the market and at 2.99% (0.95% discount from HSBC’s SVR) it is little wonder borrowers are attracted to it.
Plus it is variable so, if the Bank of England reduces Base Rate further, this pay rate could drop even more. With a standard fee of £999 this looks like an ideal mortgage for many borrowers. But there is a catch.
The deal is an exclusive mortgage only available to HSBC’s Premier customers. And to qualify to be one of those you need to either have:
• £50,000 in savings and investments held with HSBC or
• a mortgage of at least £250,000 with HSBC and a salary of £75,000.
This is clearly not a mainstream product and therefore not available to most people. But it is HSBC’s cheapest mortgage rate.
The Royal Bank of Scotland (RBS) has also introduced better deals for customers who already have a relationship with the bank. The lender is offering 30% off mortgage fees for those borrowers who hold a packaged current account with the bank. The Royalties Gold current account package costs £12.95 a month (£155.40 a year).
Similarly, Alliance & Leicester offers special mortgage deals to its Premier and Premier Direct current account holders. So, if you hold one these accounts and have a 40% equity stake in your home, you could either get a 2-year fixed rate at 3.19% with a 2% fee, or a ‘Premier’ fixed rate at 3.69% with a 0.75% fee. You also get £100 cashback and free travel insurance when you open a Premier account (with strings attached).
Other restrictions are common from smaller building societies, which often have superior deals available to local borrowers. For example Cumberland Building Society offers a tracker mortgage at the highest loan-to-value ratio available -- 80% -- with a tiny fee of £599 and a competitive rate of 4.49%. This is a mortgage that would be extremely competitive and popular if open to the whole market. Unfortunately, it is only available to customers who live in the building society’s catchment area around Cumbria.
Why lenders like tie-ins
There are three main reasons that it benefits lenders to have tie-ins. Firstly it gives them an element of control.
For example if you are a HSBC Premier customer the bank already knows you are reasonably affluent. You either have at least £50,000 in savings with the bank or you have a salary of £75,000.
Since its exclusive 2.99% mortgage is only available up to 60% loan-to-value, the bank knows you have a nice chunk of equity as a safety buffer. In other words the deal isn’t too risky, so they can afford to price it keenly.
Secondly, lenders might make the money back elsewhere. With the RBS deal for example you get 30% of mortgage fees if you hold a packaged current account. Its mortgage fees are typically £799 so you would save around £233 with your 30% discount -- a decent saving. But over a two-year fixed rate it would cost you over £300 in the packaged current account fees. Of course you do get the other benefits with the Royalties Gold account, but will you use them?
Thirdly, the more products you have the more loyal you will be, another reason that lenders like to offer products with tie-ins. It works in their favour to offer you ‘loyalty bonuses’ or incentives because the more they can tie you into their brand the less likely you are to leave. Long-term customers with lots of different products are more profitable than rate tarts with no brand loyalty.
Good or bad?
If you are in a position where you can take advantage of a tie-in mortgage product without having to jump through hoops to get it, they can work out a good deal.
For example if you are already a HSBC Premier customer, you simply have access to a market-leading mortgage rate. And if you are already a Royalties Gold customer, 30% off your fees might seem like a good deal -- although you should still shop around as cheaper deal could be found elsewhere when you look at total cost.
Equally, if your local building society offers a cheaper rate to those who live within the local area, that’s great, as long as you ensure there are not cheaper mortgages available elsewhere.
Linking products like mortgages and current accounts can make it more difficult for borrowers to compare costs, as the charges can get be blurred between products.
The most important thing to remember is that there is no such thing as a free lunch and while a mortgage tie-in offer will benefit some people, it won’t work out the best option for others.
As always shopping around and working out the true overall cost of the mortgage, including charges over the deal period (for example 24 months for a two-year fixed rate), is the best way to compare like with like.
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