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.
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|
over 24 mth
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.