Focus on: Lowest EVER five-year fixed rate mortgage

News that the Funding for Lending Scheme (FLS) is being extended by a year to January 2015 means borrowers are likely to continue enjoying low interest rates on loans and mortgages for a while yet.

The FLS, which offers cheap funding to lenders on the proviso this is passed on to consumers and businesses, has encouraged mortgage rates to tumble, with lenders jostling to offer the lowest-cost deals on record.

And this time it's HSBC's turn to up the stakes, following the launch of a market-leading five-year fixed rate deal at an all-time low 2.49%.

So is this the right mortgage for you?

What's the deal?

HSBC has launched a five-year fixed rate mortgage priced at 2.49%, reverting to 3.94% after five years. The deal is the cheapest of its kind in history.

Available on borrowing of up to £250,000, the HSBC mortgage requires a deposit of 40% and you will need to stump up a fee of £1,999 on top. The overall cost for comparison is 3.6% APR and early repayment charges apply. You can see the new deal and how it compares to others from the lender here.

The latest offering from HSBC now beats Yorkshire Building Society's five-year fix at 2.59% which you can see here. This deal reverts to 4.99% after the deal period and comes with a slightly lower fee of £1,345. The overall cost for comparison is 4.1% APR. Again, early repayment charges apply.

Who's it good for?

The HSBC five-year fixed rate mortgage is ideal for those who have significant equity in their home, (or can stump up a large deposit) and who favour the security of cheap payments, rather than flexibility, over the long term.

Any catches?

The interest rate from HSBC might be the lowest on record over the five-year timeframe but it only applies to borrowing of up to £250,000, which caps this benefit. The hefty 40% deposit could also put the deal out of reach of many and the £1,999 fee is on the pricey side.

In addition, if you're thinking of applying for the HSBC mortgage you need to ensure you are happy to commit to a five-year deal.

Should you need to get out of the mortgage early you will have to pay an early repayment charge – this is quite complex so check the terms and conditions carefully to ensure you know how much you would have to pay.

You should also bear in mind that HSBC only offers its mortgages direct and not through mortgage brokers.

What's the verdict?

HSBC's five-year fixed rate mortgage at 2.49% is a great deal so long as you know what you are getting into. However, if you would prefer not to fix for as long as five years, there are plenty of shorter-term fixed rate deals available. For example, you could opt for Chelsea Building Society's two-year fix at 1.74%, reverting to 5.79% after two years (overall cost for comparison is 5.2% APR). It requires a 40% deposit and comes with a £1,545 arrangement fee and a £130 processing fee.

Alternatively, the Yorkshire Building Society's two-year deal is priced at 1.79%, reverting to 4.99% after two years (overall cost for comparison is 4.5% APR). Again, you will need a deposit of 40% but the deal has a £1,345 arrangement fee plus a £130 processing fee. Find out more here.

But even if you don't have a deposit as high as 40%, you can still take advantage of some competitive deals. For example, those with a deposit of 10% can enjoy a rate of 3.69% with Chelsea Building Society's two-year fix, reverting to 5.79% after two years (overall cost for comparison is 5.5% APR). It has a £1,545 arrangement fee and a £130 processing fee.

Early repayment charges apply to all of the above deals.

Take a look at our mortgage channel for further options.

Top tip!

While mortgage rates continue to fall, mortgage fees are going up and up, making it more important than ever to factor these into the equation when comparing deals. In some cases it can even work out cheaper to opt for a higher mortgage rate if it comes with a lower fee.

For example, if you had a mortgage of £175,000 and applied for the HSBC five-year fix at 2.49%, you would pay £49,051 in total, including the fee, over the five-year period.

Yet if you applied for the Norwich & Peterborough Building Society five-year fix at 2.74%, which has a much smaller fee of £295, you'd pay £48,679 in total over five years. So the Norwich & Peterborough deal works out to be cheaper.

In fact, it remains the cheapest option if you are borrowing anything less than £223,850 – at this level of borrowing, both the Norwich & Peterborough deal and the HSBC mortgage will cost you the same over the five years (£62,185).

For those borrowing anything over £223,850, the HSBC mortgage is cheaper – but remember, the maximum you can borrow is £250,000.

If you need more help, contact our mortgage partner, London & Country, for free, independent advice on 0844 209 8725.


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