Lenders try to tempt borrowers with new deals
Lenders have been busy in recent weeks trying to tempt borrowers back into the market. Mouth-watering rates of less than 2% have been launched by two high street banks, HSBC and Barclays-owned, Woolwich.
But behind the headline figures are penalties and small print which mean a borrower could end up better off taking out a higher rate, or even a different type of mortgage.
Look out for the small print
For instance, Woolwich's 1.98% year-long tracker comes with a £999 fee, plus there is a 2% penalty if borrowers want to move within three years.* That's a whole 2% of the outstanding loan, which would add up to another £3,119.36 on the average mortgage of £155,968**.
Meanwhile, HSBC has just trumpeted its support for first-time buyers by revealing it has set aside half a billion pounds to lend to home buyers with deposits of just 10%.
But the bank's market-leading two- year variable rate of 1.99% is only available to borrowers with a massive 40% deposit.* First-time buyers and anyone else who can only raise a 10% deposit will instead have to plump for a much less attractive 3.89% two year variable rate.
In fact, both deals are discounts linked to the bank's own standard variable rate of 3.94%.* Those who can afford a 40% deposit are given 1.95% off the standard rate while those who struggle to put together a 10% deposit are being offered only a 0.5% discount on the standard rate.
Of course, lenders set rates based on their risk and there's obviously more risk attached to lending 90% of the value of a property than 40%. But the extra interest being charged to first time buyers is phenomenal, in comparison.
And there's more! The fact that the discount is linked to HSBC's own standard mortgage rate rather than the Base Rate decided by the Bank of England, is significant. It means anyone attracted to a tracker by the belief that official interest rates are unlikely to climb in the next few months, could come unstuck if they take up HSBC's offer.
Why? Because the bank could decide to raise its own variable rate (which it is perfectly within its rights to do so) which would leave borrowers facing a higher monthly mortgage payment.
Do your research and weigh up the best deals
The thing is, comparing mortgages on the basis of the interest rate is not terribly sensible, considering lenders also make money from arrangement fees and penalty charges.
Going back to HSBC, for instance, the arrangement fee on its range of two-year tracker loans is £1,199. Yet the fee charged on its two year fixed mortgages is just £599.
Is it cheaper to fix?
So why is it so much cheaper to arrange a fixed rate? It's not. In fact, it doesn't actually cost the bank any less to set up. The truth is, HSBC knows it can charge more for the lower rate discount as it looks more attractive.
It's not just HSBC or the Woolwich that does this, of course. All lenders employ the same tactics with the most attractive rates coming with higher charges and fees. In other words, what a lender gives to you in lower interest rates, it snatches back in higher charges which means it's essential to do your sums and research to ensure you do actually get the best deal.
Let's face it, as daft as it may sound, it's entirely possible that taking out a higher rate mortgage could actually prove less expensive when you've taken account of the hidden charges. Don't rule out the low-rate discounts, just make sure you know exactly how much they are costing you. The best way to find the perfect mortgage is by comparing online.
*Rates correct as of 30 Sep 2009
**Source: Land Registry.
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