This looks like a fantastic mortgage deal... on the surface...
This article was first sent to Fools in an email as part of our Summer Lolly campaign.
Even though the sun has graced us with its presence this week, the good weather hasn't come without a price. Sure, most of us rejoice at the thought of a little sunshine to warm us on the way to work - it certainly puts a spring in my step. However, there are certain disadvantages to those glorious rays.
Only yesterday morning, tube travellers in London were faced with temperatures of 30C on their way to work. Similarly, I'm sure there might be a few slightly sunburnt people out there - myself included - who may perhaps regret the allure of the hot weather.
As with many things in life, it would seem that good things often come at a price.
But can the same be said of the Co-Op's new three-year tracker mortgage? On the surface, this looks like a great deal. Not only is it fixed at 0.99% above Base Rate (5.99%) for three years, there is no application fee or exit fee, and remortgagors get free legal work and free valuations -- making this deal the cheapest three-year tracker on the market.*
Sounds too good to be true?
The Catch
You have to open or hold a Co-Op or Smile current account to qualify for this deal. What's more, if you don't maintain a minimum of five credit or debit transactions from the current account each month, as well as paying the mortgage from the account via direct debit, the interest on your mortgage will rise by 0.35%.
Clearly, the Co-Op is trying to prevent savvy Fools from opening a current account but not using it. So be warned: if you dont want to make this account your main bank account, you must plan your financial transactions every month very carefully indeed.
And remember, this deal is a tracker, which means it rises and falls with the Base Rate. If failing to maintain your account happens to coincide with a month in which the Base Rate rises, that could cause the financial equivalent of bad sunburn.
Is It A Decent Current Account?
Let's say you are prepared to make the Co-Op account your new main bank account. The question then arises: is it a decent current account?
There are six different current accounts you can open to qualify for this deal. Some of these come with some serious catches. For example, the Privilege current account come with charges (£8.50 per month) while the Current Account Plus requires you to pay in at least £800 per month in order to be maintained.
The Current Account Plus pays the highest rate of interest of any of the six accounts: 0.5% below Base Rate, so currently 4.5%. Not great when you consider that the market-leader, Alliance & Leicester, is currently paying 8.5%, as my Foolish friend Szu Ping reported earlier this month.
If you have searched long and hard for a current account with a decent interest rate, you may be slightly put off by having to offload the bulk of your finances to an account that may not match up.
Then again, if you don't take this deal, you may end up paying more interest on your mortgage debt than you would earn on the money in your current account - so, in the end, you would be worse off. This particularly applies to UK taxpayers, who will have to pay tax on the interest they earn.
So overall, despite the catches, I'd still say the Co-Op is offering a good deal to borrowers who are prepared to meet the strict current account criteria and are happy to take out a three-year tracker.
More Packaged Mortgage Deals
If you don't mind the idea of switching your current account or savings account to get a better deal on your mortgage, but don't want a three-year tracker, there are some other deals which may tempt you.
For example, Alliance & Leicester is offering exclusive mortgage rates to its Premier Account and Premier Direct account holders, which include a two-year tracker at 5.89%. Again, you can be an existing or new current account customer. And the Premier Direct account, as I mentioned earlier, pays a whopping 8.5% interest, making this seem like a decent all-round current account and mortgage package.
But again, there are some nasty conditions attached to your use of the current account - you must be 21 and fund the account every month with £500. And it is not by any means the cheapest two-year tracker deal available on the market, as it comes with a huge 1.75% product fee (so a £150,000 mortgage borrower would have to shell out a massive £2,625).
Similarly, earlier this summer, my Foolish friend Jane Baker wrote about another `packaged' mortgage deal from Natwest in this article. As she explains, this bank will offer you a maximum of £5,000 cashback on a Natwest mortgage if you save for six months using a First Home Saver account - but there are lots of complicated strings attached. And there is no guarantee that the Natwest mortgage you qualify for will be the cheapest you could get - it could well be £5,000 more expensive.
Check The Small Print
As you can see, checking the small print of these sorts of packaged deals really is vital, especially when it comes to the mortgage deal as, for most of us, this is far more important - and potentially costly -- than the quality of a current account.
One thing's for sure: packaged mortgage deals are growing in popularity as competition for savings and current account customers heats up among the banks. Like the week of sunshine we have just had, deals like the Co-Ops may well be a good sign of things to come this summer....
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*Calculation based on the average Foolish borrower with a £150,000 mortgage.
Checklist: Packaged Current Account & Mortgage Deals
Check the interest rate of the linked account - most packaged current accounts don't pay very much interest at all.
Make sure you look at the details of the accounts offered - you may not qualify.
Investigate the facilities available on the account - is there an overdraft facility?