Is a 0.89% mortgage as good as it seems?
As price war erupts, property owners are warned over rates that can rocket
ANEW mortgage price war has broken out across the UK with one of the country’s leading building societies launching a home loan with a rate never bettered before – 0.89 per cent. But sceptics say the move by Yorkshire is more an attempt by the mutual to grab the headlines than to provide homeowners with a loan suitable for today’s uncertain times – and the rocky months ahead, economically and politically.
For the past year Yorkshire has been in a ding- dong battle with HSBC and the bank’s online offshoot First Direct to be seen as the country’s friendliest mortgage provider. In June last year, HSBC launched a record low two-year fixed-rate mortgage, priced at 0.99 per cent. Yorkshire responded with a loan priced at 0.98 per cent.
A temporary truce followed, resulting in the best loan deals edging above 1 per cent. But now Yorkshire has laid down a new marker with its 0.89 per cent offer. Other lenders are likely to respond by launching keenly priced loan deals, some maybe undercutting the rock bottom 0.89 per cent rate.
David Hollingworth, mortgage expert at broker London & Country, says borrowers have ‘never had it so good’. He believes that all homeowners should be responding to the loan war by reviewing their mortgage arrangements to see whether they can shave pounds off their monthly bills by moving to a new lender and remortgaging.
But he warns those looking to take advantage of falling loan rates to tread carefully. Only a fixed-rate loan will provide borrowers with payment certainty – and all-important financial protection when interest rates start to rise, as they probably will soon after the June 8 General Election.
The Yorkshire deal is a variable rate loan, which means borrowers have no protection against rising interest rates. If the lender pushes up its standard variable rate (SVR) for its other mortgages at any time in the next two years, the initial rate will rise by the same amount.
At the end of two years, the rate will revert to the lender’s SVR, which is currently 4.74 per cent. This means borrowers will have to remortgage if they want to avoid a painful rise in payments.
For example, a £100,000 25-year repayment loan taken out on Yorkshire’s record low rate would result in monthly repayments of £372. If the lender leaves its standard variable rate untouched for the next two years, a borrower would see their monthly payments rise to £570 once the effective 3.85 percentage point discount ends.
But the chances of the SVR staying at 4.74 per cent are slim. If this rate were to jump to 5.74 per cent between now and April 2019, a borrower on Yorkshire’s deal would see their rate rise to 1.89 per cent, resulting in a monthly mortgage bill of £419. After April 2019, the rate would jump to 5.74 per cent, resulting in a monthly bill of £629.
A steep arrangement fee of £1,495 also renders the deal unsuitable for remortgages where owners have little left to pay on their loan. It is also only available to those looking to borrow up to 65 per cent of their property value.
Hollingworth says nine out of ten borrowers are currently electing to fix because of the certainty it provides. He sees no reason for this to change, irrespective of what the likes of Yorkshire come up with.
HISTORICALLY, most borrowers who fix have opted for two- year deals. But longer-term fixes are now proving popular, as their cost comes down. Five-year fixes can be obtained at just 1.75 per cent, compared to twoyear fixes at 1.23 per cent. The price gap was wider two years ago, which often made cheaper shortterm deals more attractive.
Atom Bank has some of the lowest fixed rates. Its five-year fix is at 1.59 per cent with a 1.99 per cent arrangement fee. Borrowers need 25 per cent equity.
Among the cheapest ten- year deals is a 2.49 per cent loan from First Direct. A minimum 40 per cent equity or deposit is needed, but there is no upfront fee.
Even those with less equity can get a competitive rate. HSBC has a five-year deal at 2.09 per cent with a £999 fee for those with a deposit or equity of 20 per cent.
Nationwide Building Society has a ten-year fixed rate at 3.89 per cent for those with a deposit or equity of just 10 per cent.
It comes with a £999 fee, but firsttime buyers get £500 cashback on completion.