HSBC is offering a mortgage with an interest rate of just 0.99%. Is there a catch?
It’s the latest lender to offer a headline-grabbing rate in order to conquer the all-important top spot in the best buy tables.
But is the deal as good as it sounds?
The 0.99% mortgage
But the bad news is it’s not a fixed rate but a two-year 'discount' rate instead.
Discount rates are pegged to a lender’s standard variable rate (SVR). HSBC’s SVR currently stands at 3.94% and the discount is 2.95% which gives the 0.99% initial discount rate. After two years borrowers will pay HSBC’s SVR. The deal comes with a hefty £1,499 fee and a maximum loan-to-value (LTV; the percentage of a property's value you can borrow) of 60%.
SVRs can change at a lender’s discretion so HSBC can increase the rate whenever it likes. However, most SVRs move in line with the Bank of England Base Rate – if this increases, HSBC’s SVR will almost certainly follow.
Doing the sums
It’s important to do the sums and take fees into account when comparing mortgage deals.
Assuming HSBC’s SVR doesn’t change, a borrower with a £250,000 mortgage would pay a total of £24,084 over two years on the 0.99% deal.
HSBC has also dropped the rate on its two-year fixed rate to offer the lowest on the market. For customers with 40% deposit or equity in their property borrowers can fix at 1.19%, down from 1.29%, for two years with a £1,499 fee.
Over two years this deal would cost a borrower with a £250,000 mortgage a total of £24,631. That’s £547 more than the 0.99% discount deal.
Borrowers who want the security offered by a fixed rate would be better off with Yorkshire Building Society than HSBC. It’s offering a 1.29% two-year fix with a £845 fee. Borrowers with a £250,000 mortgage would pay a total of £24,253 in payments and fees over two years, £378 less than on HSBC’s 1.19% rate.
However, it’s worth bearing in mind that the bigger your mortgage amount the more important the rate, not the fee, becomes. So if you had a £1 million mortgage you’d be better off paying a higher fee to get HSBC’s 1.19% rate than opting for the low fee available on Yorkshire’s 1.29% deal.
Will interest rates rise?
Whether a 0.99% discount rate is right for you very much depends on what you think interest rates will do over the next two years and if you could afford higher payments should the rate increase.
Currently most economists are not predicting the first rate rise until late 2015 or even sometime in 2016.
The Bank of England vote to keep rates on hold in January was unanimous for the first time since last July and inflation continues to fall for now.
But even if rates do rise the HSBC deal is still pretty good. A 0.25% rise in the SVR would see the interest rate on the discount mortgage rise to 1.24%, which is still cheaper than most rival deals. Monthly payments on a £250,000 mortgage would rise by £52.
Will mortgage rates go any lower?
The mortgage market is seeing new record low rates launched almost weekly at the moment.
However, although it’s technically possible for fixed or discount rates to go even lower than 0.99%, it’s pretty unlikely and it wouldn’t be by much.
My tip would be to snap up low rates while you can rather than waiting for rates to fall even further.
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