Mortgage price war: lowest fixed rate deal launched
Yorkshire Building Society (YBS) has reclaimed its position as the lowest-rate mortgage provider, after shaving a fraction off its rate in response to a rate cut by rival HSBC.
YBS’s new two-year fixed-rate mortgage costs 1.14% for people borrowing up to 65% of their property value. It comes with fees of £1,710.
It’s the second rate cut from the building society in a fortnight after it slashed rates on its two-year fix to 1.17%, only to be undercut by HSBC, which dropped its two-year fixed rate to 1.16%, plus fees of £1,696.
However, these rate cuts are about lenders jostling position for the coveted top spot in best buy tables – the potential savings in reality are very small. The difference between 1.17% and 1.16% on a £150,000 mortgage is only about £1 a month.
So how do the two deals compare?
If you factor in fees, the YBS deal is about £10 cheaper over the first two years than HSBC, but that could quickly unravel if borrowers forget to remortgage when the standard variable rate (SVR) kicks in. YBS’s interest rate rockets to 4.99% (variable) after two years, while HSBC’s climb to 3.79%.
This means on a £150,000 mortgage, borrowers with YBS would see repayments jump to £850 a month from £575, a 48% hike.
HSBC’s costs would also increase substantially, but by not nearly as much – from £576 to £769, a 34% increase.
In the worst case scenario where borrowers never remortgage, the HSBC deal would cost around £20,000 less over the full mortgage term.
These price hikes are however completely avoidable, but only if you remember to remortgage at the end of your fix. If you don’t, you could find yourself paying hundreds of pounds a month more than you need to.
Consider fee-free deals too
It’s vital to remember that the lowest rate isn’t necessarily the best deal if you need to pay a four-figure fee to get it.
Someone borrowing £150,000 with YBS’s 1.14% fix would pay £15,510 over the first two years in monthly repayments and upfront fees.
But a 1.49% two-year fixed-rate deal from Norwich & Peterborough, which is actually part of the YBS Group, could work out cheaper as its initial fees are at least £1,000 lower. That deal would cost £599 a month. Including £635 in fees, that would cost £15,011 over the first two years, saving around £400.
The same warning about standard variable rates applies here though – Norwich & Peterborough’s deal reverts to a variable 4.99% rate.
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.