The best mortgage deals I have ever seen

HSBC and Woolwich have each launched variable mortgage deals with staggeringly low interest rates. But which is the better deal? John Fitzsimons investigates.

I have never been a big fan of variable mortgages.

I'm the kind of bloke that likes a bit of certainty in my life, and that means I like knowing exactly how much I'm going to be forking out on the mortgage each month. Taking the gamble of a rate that could go up or down has never appealed.

But the last few months has made me reassess the viability of variable mortgages, particularly with the launch of two shockingly cheap looking mortgages, one from Woolwich, one from HSBC, each charging a rate of interest at less than 2%.

These are two cheapest mortgages I have ever seen!

But are they as good as they look?

The HSBC 1.99% mortgage

Let's start with the HSBC deal, as this was the one that really got the ball rolling.

It's a two-year discount mortgage. So for two years, the mortgage tracks the HSBC standard variable rate minus 1.95%. As the HSBC variable rate currently stands at 3.94%, you are looking at a rate of 1.99% - an amazing rate in anyone's book.

Of course, it's not the easiest mortgage to get your hands on. You'll need a deposit of 40%, and will have to pay an eye-watering product fee of £1,199 to get the deal, but it's certainly proving popular - online traffic to the HSBC website has doubled, while calls to its call centres have jumped by 74%.

The deal is certainly attractive, but there is some uncertainty with it. It's one thing to have a mortgage rate that tracks Bank Base Rate, it's quite another have one that tracks a lender's variable rate. While the lender's variable rate tends to go up and down with Base Rate, it is not guaranteed to do so.

So Base Rate could stay where it is, but HSBC could raise its variable rate, and your monthly payments would go up.

And even if HSBC does move the variable rate up when Bank Base Rate does eventually start to climb, you could find it is increased by more than the Base Rate increases - so even though Base Rate may go up by 0.5%, your mortgage's interest rate might go up by 1%.

So it's a bit risky.

Then again, you're only tied in for two years. And the base rate is unlikely to rise dramatically during that time, which means it is unlikely HSBC will decide to raise its variable rate dramatically either.

There is another downside, however: a £1,199 product fee, which is a couple of hundred quid higher than the average fee most lenders charge.

The Woolwich 1.98% mortgage

Keen not to be outdone, Woolwich has launched its own mega-low variable deal, a one-year step lifetime tracker.

Here's how it works. For the first year, the mortgage tracks Barclays' own variable rate (currently standing at 0.5%) plus 1.48%. So as things stand, that's 1.98%. Then, from January 2011, the mortgage tracks Barclays' variable rate plus 2.49% for the remainder of the mortgage.

Not only will you be paying a cheaper rate of interest, but it's also £200 cheaper to get hold of, with a product fee of £999.

However, as with the HSBC deal, you are taking a gamble on that interest rate. Again, there is no guarantee that the rate will only go up when the Base Rate increases, nor that it will only increase by them same amount that the Base Rate does.

When rates start to increase

However, it's the early repayment charges where there is a potentially significant difference between the two deals. With the HSBC mortgage, should you want to remortgage to a different deal within the first two years you will have to pay a charge of 1% of the sum repaid.

A touch inconvenient perhaps, though in all likelihood I can't see Base Rate being that high two years down the line.

And after those two years are up, you are fee to remortgage without paying any penalties.

However, with the Woolwich mortgage, you will be charged 2% of the sum repaid if you try to move anywhere else before the end of January 2013.

That's not only double the sum you would pay with the HSBC deal, but you are also tied in longer: three years and three months. Frankly, you'd be mad to try to predict with any certainty what interest rates will look like in 2013.

And don't forget, between January 2011 and January 2013, you will have to pay an extra 1%, as the rate increases from Barclays' rate plus 1.48% to Barclays' rate plus 2.49%.

The big virtue of going for a variable mortgage at the moment is to take advantage of the low interest rates to overpay each month, build up your equity in the property and cut how much interest you eventually pay on the mortgage.

However, if you were to do this with the Woolwich deal, you run the risk of being whacked with a pretty significant charge should the interest rate rise to such a level that you are really struggling.

Is it worth it?

Of course, if you budget for increases in Base Rate and are committed to sticking with the Woolwich tracker mortgage until at least 2013, then this is not much of an issue.

The fact remains that both mortgages offer a very attractive proposition, though if I had the choice I would always go for the HSBC deal. Yes, the rate is 0.01% higher, there's an extra £200 fee does and it's less transparent (because it doesn't track the Base Rate). But, because you're not tied in for a hefty period with early repayment charges, it remains the best variable mortgage in the market, in my view.

Just bear in mind that variable mortgages are always a gamble, and should only be taken out by borrowers who have the flexibility in their monthly budgets to meet any increases in rates. If that's you, and you are determined to make hay while rates are low - and according to Capital Economics, Base Rate could stay at 0.5% for five years - then both of these mortgages should be at the top of your wish list.

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