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The sub-1-per-cent fixed rate mortgage

Mark Churchill 24 June 2016

We've been wondering when this might happen.

The sub-1-per-cent fixed rate mortgage is now a reality.

There have been 0.99% tracker mortgages before. But the trend on this chart has reached its next obvious milestone, and the 1% fixed rate barrier has finally been breached by this deal from HSBC:

It's the lowest 2-year fixed rate the UK mortgage market has seen in living memory.

However:

It might not be the cheapest mortgage for you. You know, it might not even be the cheapest HSBC mortgage for you.

Let me illustrate…

The 0.99% mortgage versus the no-fee mortgage

First, let's assume you're remortgaging and have at least 40% equity in your home, because this deal is only available up to 65% LTV, and the one we're going to compare it to has a maximum 60% LTV. You could also be a first-time buyer with deposit of at least 40% of the home's value (unlikely, I know). The length of mortgage you're looking for is 25 years.

Now, the fee on the 0.99% fixed rate mortgage is £1,499.

That above-average fee front-loads the cost of this mortgage significantly. Is it worth paying £1,499 to enjoy such a low rate of interest for two years?

It depends how much you're borrowing.

For comparison, HSBC also offers a fee-free two year fixed rate mortgage, with a starting interest rate of 1.79%:

With both these deals, since your mortgage payment will be fixed for just 24 months (after which, it reverts to a rate the bank can vary at any time – currently 3.94% APR), the only sensible way to compare this to other mortgages is to add up the total borrowing cost over that two-year period: fees + interest.

This is sometimes called a true cost comparison. Here's how the comparison works out for both these mortgages:

0.99% initial rate 1.79% initial rate
Amount of
mortgage
Monthly
payment
Fee Total cost
24 months
Monthly
payment
Fee Total cost
24 months
Difference
over 24 mth
£100,000 £376.41 £1,499 £10,533 £413.70 £0 £9,929 -£604
£125,000 £470.52 £1,499 £12,791 £517.13 £0 £12,411 -£380
£150,000 £564.62 £1,499 £15,050 £620.55 £0 £14,893 -£157
£175,000 £658.73 £1,499 £17,309 £723.98 £0 £17,376 £67
£200,000 £752.83 £1,499 £19,567 £827.41 £0 £19,858 £291
£225,000 £846.94 £1,499 £21,826 £930.83 £0 £22,340 £514

Source: YourWealth mortgage comparison tables

As you can see, you'd need to be borrowing £175,000 or more to be any better off after two years. And you'd be paying a chunk of that cost upfront in the form of that fee.

Meaningful savings with the 0.99% mortgage don't start until you're borrowing £200k or more. At 60% loan to value, that means your home would need to be valued at £333,500 or more, and you need to have £133,000 deposit or equity.

Who can benefit from the 0.99% fixed rate mortgage?

For homebuyers with more valuable homes and significant equity, it could be an exceptional deal – provided that:

  • You have £1,499 available in your cash flow (plus the other costs of getting a mortgage)
  • You have six-figure deposit or equity in a home worth more than £300k
  • You can face only being sure of your monthly mortgage payment until 2018 – at which point the interest rate could rise around 3%, meaning at least a £300 jump in your monthly outgoings

For smaller borrowers, this serves to illustrate why you can't trust the initial rate as a buying signal: it often means a large fee.

Compare no-fee mortgages

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