Pay less than 1% on your mortgage!

You can get a tiny rate on your mortgage at the moment. But is there a hidden catch?

Mortgage rates have plumbed to record lows this year, and borrowers can now pick from three mortgage deals which incredibly offer a rate of less than 1% interest.

Chelsea Building Society, HSBC and The West Brom Building Society are the lenders in question, and the table below illustrates the basic features of their mortgage deals.

While the headline rates look great, these deals will only last around two years before reverting to much higher rates in the form of the lender's standard variable rate (SVR).

At that point, you’d either be stung by much larger monthly repayments, or face shopping around for a new deal, potentially incurring a second set of expensive product fees.

Chelsea Building Society’s deal is a tracker mortgage, calculated as the Bank of England’s Base Rate (currently 0.5%) plus 0.48%. So if the Base Rate rises, so do your repayments.

HSBC and The West Brom are offering discounted variable rates, which are slightly different. The discount in question is from the lender's SVR, which the lender can increase at any time, irrespective of what's happening with Base Rate. As a result they are far more of a gamble.

What about a fixed rate?

The security of a fixed rate mortgage might appeal to some. Although you pay higher monthly repayments, for a set term you are guaranteed the same rate, regardless of the Base Rate or your lender's SVR.

Let's look at an example, with a £150,000 mortgage over a 25-year term. With the HSBC discounted variable, you'll be looking at monthly repayments of £566.18. Over two years, assuming the rate doesn't move, you'll have to pay £15,087, including the mortgage fee. 

With a fixed-rate deal over the same period with Post Office Money, you'd be looking at a rate of 1.15%. That means monthly repayments of £578.16, so over two years you'll pay £15,870.84 (including the £1,995 mortgage fee). So you'll shell out an additional £800.

While these variable rates are cheaper in theory, it's a bit of a gamble, and in practice rates might rise and spoil your calculations. With fixed rate deals you have the assurance of knowing exactly how much you'll be paying per month for as long as ten years, but you pay more for this security.

If you're already on your lender's SVR, it's definitely time to take a look around current mortgage deals to cut your monthly repayments and the total amount you end up repaying on your mortgage.

Overpay if you can

With these low-rate deals, the best thing you can do is concentrate on hacking away at your outstanding mortgage debt. If you really focus, and put both your monthly repayment savings and extra cash on top into the pot, you could make a serious dent in your debt while only being charged minimal interest.

This means that when it's time to look for a new deal, you'll have a lower LTV ratio, which will hopefully open up better offers - meaning that you can save more in the long run.

How much you'll benefit from this strategy completely depends on your personal circumstances and your ability to be flexible with your finances. 

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