A new HSBC mortgage enables first-time buyers to borrow at 3.84% - even if they only have a 10% deposit.
I feel very sorry for young people who want to buy a home at the moment. Many of them are paying record-high rents to keep a roof over their head and would love to buy their first property. But they just can’t get a mortgage.
So it’s nice to see that HSBC is trying to help. Today the bank launched an attractive new mortgage that is aimed at first-time buyers who only have a 10% deposit. The rate is just 3.84% and there are no fees attached. This special promotional rate will last for two years after purchase.
HSBC says this new mortgage is part of a plan to lend £350 million to borrowers who only have a deposit in the 10% to 15% range.
Minus points
Although the mortgage is attractive in many ways there are some downsides. Most importantly, this is a discounted rate mortgage. That means that it’s linked to HSBC’s Standard Variable Rate (SVR), not the Bank of England’s base rate. HSBC can change its SVR whenever it feels like doing so and for whatever reason.
So even if the base rate was still at 0.5% in a year’s time, HSBC could still increase the rate on this mortgage if it wished. That means some first-time buyers could be hit by higher rates sooner than they expected.
HSBC also has a reputation for being very picky when it comes to choosing who to lend to. Mortgage brokers tell me that the bank is only interested in borrowers with excellent credit scores who can easily afford their mortgage payments. I’m also told that HSBC can take a while to make a decision on whether to lend or not.
HSBC says this reputation is undeserved, but either way don’t assume that your application will definitely be successful.
The other factor to consider is house prices. One leading economist has suggested that house prices could stagnate for years to come and there’s a chance that house prices could fall further from here. If house prices were to fall, some first-time buyers could find themselves in a situation where they have no equity at all in the home, or even worse, negative equity.
Alternatives
That said, given that’s it preferable to buy a home now rather than waste your money on rent, I suspect that most people will be happy to take that risk. This raises the question: are there any decent alternatives to HSBC’s new mortgage?
If you fancy a tracker mortgage where the rate moves in the line with the base rate, take a look at a deal from Abbey where you can get a 4.99% rate (base rate + 0.5%) which lasts for two years. The fees are only £495 and you’ll also get £250 cashback. As with HSBC, you’ll only need a 10% deposit. This deal is only available through a mortgage broker.
All other things being equal, tracker mortgages are better than discounted deals because your rate will only change if the base rate moves. With a tracker, the lender can’t change the rate on a whim.
But in the current environment, I think that a fixed rate mortgage beats both trackers and discounted mortgages. That’s because interest rates can only really move one way from here – upwards. So if you can find a good rate, why not lock it in while you can?
When it comes to fixed rate deals on small deposits, HSBC comes out top again. The bank offers a 2-year fixed rate deal at 4.49% and a 5-year fixed rate at 4.89%. Both deals are fee-free.
Personally, I’d go for the 5-year fix as I doubt that interest rates will go up much in the next two years, but if you lock in your rate for five years, you’ll be laughing if the base rate really starts to take off in 2014 or 2015.
That said, the choice is yours. And if you want to get some independent, free advice, why not have a chat to one of our brokers?
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Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
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