Focus on: Fix your mortgage at just 1.99%

Mortgage rates have been sliding for months but HSBC has really now thrown down the gauntlet by issuing its cheapest-ever fixed rate mortgage.

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The deal is fixed at an eye-catching 1.99% for two years.

But while a fixed rate of less than 2% may look appealing, there are some catches – notably a very high arrangement fee.

Here, we take a closer look at the new offer so that you can decide if it could save you money on your home loan.

What’s the deal?

The new market leading deal from HSBC is bound to prove attractive to many as a result of its interest rate of just 1.99% - fixed for two years.

The mortgage is available to both first time buyers (FTBs), as well as people moving up or down the property ladder and those looking to remortgage their existing homes.

For those remortgaging, the terms of the deal also include payment of legal fees, making it an even more enticing option.

However, you must have equity or a deposit of at least 40% to qualify for the deal, which also comes with a hefty arrangement fee of £1,999 (or £1,499 for HSBC current account customers).

Any catches?

While the 1.99% two-year fix is available to first-timers, it is unlikely to prove a viable option for many due to the size of the deposit required.

Other potential catches of the deal include early redemption charges of 2% of the outstanding loan in the first year and 1% in the second year.

The most punitive aspect of the new, low-rate HSBC offer, however, has to be its high arrangement fee.

At £1,999 for non-HSBC current account customers, it is one of the biggest upfront mortgage fees in the best buy tables.

It will make the offer potentially more expensive than deals with higher interest rates for some – particularly as the 1.99% rate is only fixed for two years and savvy borrowers will want to switch again at that point.

Clare Francis, mortgage expert at MoneySupermarket, said: “Although HSBC’s 1.99%, two-year fix does appear attractive, the high set up cost can actually make it more expensive than other deals on the market.

“A high arrangement fee may be worth paying, but it will depend on the amount you are looking to borrow.”

What’s the verdict?

This new two-year fix from HSBC has a fantastic headline rate and will undoubtedly prove popular – especially among those looking to borrow a large amount.

It is a good idea to do your sums before applying, though as you will see below for an illustration of how the amount you need to borrow will affect the value of the deal.

Even though the Bank of England base rate is expected to stay at 0.5% for some time, it is also worth considering that it may be moving upwards again in two years time.

Anyone concerned about that possibility may therefore prefer a longer-term mortgage deal.

Longer-term options worth looking into include Britannia Building Society’s five-year fix at 2.79% with a £999 fee.

However, like most of the best deals on the market, it is open only to those with at least 40% of the property value to put down as security.

The best five-year fix for borrowers who can only raise 10% of the property value is from HSBC at 4.69% with an £899 arrangement fee.

Top tip!

As mentioned above, mortgage rates have fallen since the Funding for Lending scheme (which makes lending cheaper to banks on the condition they lend it onto borrowers) was launched this summer.

But when comparing mortgages is it vital to work out the total cost over the term of the deal.

And to do that, you must add the arrangement fee to the monthly repayments.

Clare Francis said: “We may have seen more products launched and rates come down since the Bank of England Funding for Lending Scheme was introduced, but because fees have gone up in many cases it isn’t necessarily resulting in cheaper mortgages.”

Generally speaking, the more you need to borrow, the less impact the arrangement fee will have on the overall cost.

Whether this eye-catching new HSBC deal is right for you will therefore depend on the size of the mortgage you need to take out.

Say you need to borrow £100,000 as a remortgage on your £300,000 home, MoneySupermarket figures indicate that a West Bromwich Building Society mortgage with a pay rate of 3.69% would work out cheaper over two years than the HSBC deal at 1.99%.

This is because, while the monthly repayments with West Bromwich would be £510.87 compared to just £423.37 with HSBC, the deal has upfront fees of just £99.

If, on the other hand, you need to borrow £250,000 as a remortgage on a property worth £600,000, the HSBC deal at 1.99% is the clear winner at a total cost of £27,896 over two years compared to £29,700 with West Bromwich.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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