Mortgage lenders in new rate war
This month, HSBC launched its cheapest ever mortgage, sparking a flurry of price cuts among other mortgage lenders. So how much have things improved? Victoria Bischoff investigates…
Amid signs that mortgage lending is increasing and house prices are starting to recover, came the news this month that HSBC has launched its lowest ever mortgage rate.
The two year discount deal comes with a starting rate of just 1.99%, an incredibly attractive prospect for cash-strapped home owners.
Meanwhile, big lenders Woolwich and Cheltenham & Gloucester have also announced they are trimming the cost of their fixed-rate mortgages and launching new products.
So, what does this price party mean for you and me?
The changes in more detail
HSBC
HSBC's new deal lasts for two years, and the cost of the mortgage is set at a 1.95% discount to the bank's standard variable rate (SVR) - currently 3.94%. This means the bank's hot new product has shot to the top of many mortgage best buy tables; right now, it comes with a headline rate of just 1.99%.
This mortgage also comes with a comparatively hefty arrangement fee of £1,199. It is only available to remortgaging homeowners and buyers with a deposit of at least 40%.
Woolwich
Barclays bank's mortgage arm, Woolwich, has cut the price of its two year fixed rate mortgage by 0.2%. It now comes with a rate of 4.09%, and a fee of £999.
Woolwich has also launched a second loan with a slightly higher rate of 4.19%, but a lower £499 fee.
Both deals are available to customers with at least a 30% deposit.
Cheltenham & Gloucester
Meanwhile, Cheltenham and Gloucester, owned by Lloyds Banking Group, has reduced the cost of its two and three year fixed rate mortgages by between 0.1% and 0.2%.
This leaves a two year 60% loan to value (LTV) mortgage costing 4.19%.
Best rates need big deposits
Since the credit crunch, lenders have become far warier about who they will and won't lend to. As a result, they tend to demand bigger deposits and equity stakes from mortgage borrowers - which not everyone can afford.
Back in August, research by Moneyfacts found that borrowers looking to get a mortgage must now find a deposit three times higher than they would have needed two years ago.
The attractive deals on offer from HSBC, Woolwich and Cheltenham and Gloucester are no exception to these post-credit crunch rules.
HSBC's deal, the cheapest on the market right now, demands a 40% deposit or equity stake - as does the two year fixed mortgage on offer from Cheltenham and Gloucester. .
Meanwhile, Woolwich's two year fixed rate mortgages require borrowers to put down at least a 30% deposit.
Are variable rates the best bet?
On the whole, variable rate mortgages still look cheaper than fixed rate deals of equivalent length. For this reason, borrowers have begun to find variable rate deals more appealing.
According to the John Charcol Index, a monthly mortgage activity monitor, the market share taken by variable rate deals more than doubled in July 2009.
And with the Bank of England base rate expected to stay low for some time to come, it's no wonder that affordably priced tracker deals are enjoying continuing popularity.
However, it is worth noting that the new 1.99% rate from HSBC is not a tracker deal; it is a discount deal, which means it will work very differently.
While the interest rate on a tracker mortgage moves up and down in accordance with changes to the Bank of England base rate, the payrate on a discount deal will follow alterations in your lender's SVR.
Lenders are well within their rights to change their SVR at any time, irrespective of whether the base rate has moved. This means that if your lender chose to suddenly bump up its SVR, your great headline mortgage rate could start to look much less attractive.
For this reason, it's important not to treat a deal such as that from HSBC in the same way you might treat a tracker mortgage. You must plan for unexpected or arbitrary increases in your mortgage pay rate that are not related to Bank of England decisions.
An opportunity to overpay
Some borrowers may be attracted to cheap, variable rate mortgage deals because their low cost is likely to provide borrowers with the opportunity to overpay.
In these days of ultra-low rates, opting for the cheapest mortgage deal you can find and then throwing any spare cash you have at your home loan could help you reduce your capital debt at a much swifter pace - thus reducing the lifetime of your mortgage and its overall cost.
However, you must always check with your lender before you start overpaying your mortgage.
Not all banks and building societies allow overpayments, and you may incur charges for doing so.
In a fix?
There are always some people, such as first time buyers, who may prefer to opt for the security of a fixed rate mortgage. This is the case even though fixed rate deals are currently more costly than their variable rate counterparts.
Locking into a fixed rate deal will give you the peace of mind that your lender cannot suddenly hike up your interest rate as and when it chooses. Nor will your payrate be affected by fluctuations in the Bank of England base rate if you go for a fixed rate mortgage.
If you're on a tight budget and need to know exactly how much you'll be required to repay each month, a fixed rate deal that can't suddenly become more costly may appear very appealing.
However, it is also worth bearing in mind that if you opt for a fixed rate deal, you won't benefit from any cuts made to the Bank of England base rate, or your lender's SVR, during the term of your mortgage.
Ultimately, therefore, choosing any kind of mortgage will entail a risk of some sort. It's up to you to assess your own individual circumstances and decide what deal is right for you.
Many people find the help of a specialist broker invaluable when trying to make the right choices and find the ideal mortgage for them.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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