Yorkshire Building Society launches lowest ever mortgage rate for first-time buyers
First-time buyers can now lock in a record-low 1.98% rate on their mortgage for two years with Yorkshire Building Society (YBS), provided they have at least a 10% deposit and are willing to pay an up-front fee.
YBS is the second lender to break the 2% barrier for first time buyers, narrowly undercutting HSBC’s 1.99% deal, which launched in April 2015. The YBS deal also has lower up-front fees, totalling £1,345, some £350 cheaper than HSBC’s initial charges, which are £1,696.
YBS deal reverts to a 4.99% standard variable rate (SVR) after the fixed rate period, while the HSBC will rise to 3.94%. Either could change at any time.
Rachel Springall, finance expert at Moneyfacts, says “It’s fantastic to see Yorkshire Building Society support first-time buyers by offering a competitively priced deal for those with a 10% deposit.
But it’s important to look at the total cost of the mortgage, and not just the headline rate, she adds. “Borrowers must always work out the true cost on their mortgage deal and raise enough cash to cover all their upfront fees, such as legal costs or a product fee.”
Someone looking to buy a £250,000 property over 25 years with a £25,000 deposit would pay £951 per month during the fixed term with YBS, which is £1 a month less than HSBC’s deal. After considering fees, the YBS mortgage costs £370 less in the fixed-rate period, at £24,169 over two years, compared to £24,539 for HSBC.
For people who want to fix their repayments for longer, YBS has also launched a five-year fixed-rate deal to buyers with a 10% deposit. The fees and SVR are the same as the two-year offer (£1,345 and 4.99%), though the interest rate is 2.93%, or 0.95% higher. For the mortgage borrower above, this deal would cost £1,059 a month, and £26,761 over two years, including fees.
So what’s the catch?
While these two-year deals are among the best there has ever been for first-time buyers, they have a nasty sting in the tail after the fixed-rate period ends.
HSBC’s 3.94% SVR means repayments will rise by about £210 a month after two years in the borrowing example above. However, the YBS mortgage has a much higher 4.99% SVR, which means repayments will increase by £330, providing the variable rate doesn’t change.
Though introductory offers on mortgages have been improving and are currently the cheapest on record, SVRs have been quietly creeping up. In practice, this means if you don’t make a note to remortgage, you’re paying for someone else’s cheap home loan.
What other options are there for first-time buyers?
The cheapest rates don’t always mean the cheapest mortgages, as you can sometimes pay less overall on a higher rate, if the up-front fees are lower.
But that’s not the case this time, at least for people borrowing at least £225,000,or 90% of a £250,000 property.
The best fee-free deal for first time buyers is HSBC’s two-year 2.49% fix. A 25-year mortgage on a £250,000 property with a 10% deposit would cost £1,008 per month, and £24,192 over two years.
That’s slightly more expensive than the new YBS deal. But many buyers might be willing to spend £23 more over two years, if it means they don’t need to stump up an extra four-figure sum when choosing a mortgage. They will need to factor in higher monthly repayments though.
Again – it’s vital to make a note to switch after the fixed rate period, as repayments for the fee-free HSBC offer rise to £1,167 after the fixed rate period, assuming the 3.94% SVR doesn’t change.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.