Woolwich has launched a new fixed-rate mortgage at 2.29%. Should you sign up?
Barclays' mortgage arm Woolwich launched its lowest ever fixed-rate mortgage last week. Borrowers pay 2.29% for a year and the bank claims it's the lowest mortgage on the market for either tracker or fixed-rate mortgages.
After one year, the mortgage switches to a tracker at 2.29% above base rate for life, which at current rates would be 3.79%. The mortgage is offered at 60% loan to value and there is a £995 arrangement fee.
Sounds good at a first glance, doesn't it? But let's take a look at whether it's really as good as it sounds.
Pros
Undoubtedly 2.29% is an impressive fixed rate and something that just 12 months ago would have seemed unbelievable. 2.29% above base rate looks good at the moment too as it gives a current pay rate of 3.79% which, historically, is pretty low.
Woolwich doesn't have collars on its tracker mortgages, so if the base rate fell to zero, those paying the tracker rate after a year would pay just 2.29%.
Other lenders have also launched some decent fixed rates lately. Natwest and Royal Bank of Scotland currently offer a two-year fix at 3.49% for those needing to borrow 75% or less of their property's value. HSBC offers a two-year discount rate at 2.99% but the deal is only available to customers who have more than £50,000 of savings with the bank or a £250,000 mortgage and salary of £75,000. Borrowers also need a deposit of at least 40% of the property's value.
Cons
Woolwich's 2.29% rate is not available to everyone - there are some pretty strict criteria attached to the deal that will rule out many borrowers' eligibility.
For starters, the mortgage is only available to homeowners borrowing between £200,000 and £500,000, and they'll also need a deposit of at least 40%. This means that people with a small deposit or less equity in their property will need to look elsewhere.
Borrowers are also tied in for three years and will have to pay early repayment charges if they want to switch before this. If interest rates rise - and who knows what will happen in the next three years - a tracker at 2.29% above base will not be so attractive. If the base rate rises as quickly as it has fallen in the past few months, some people could be caught out by sharply increasing monthly payments.
So even though the mortgage is advertised as a fixed rate, the deal actually involves two years on a tracker rate, twice as long as the fixed rate lasts for. This won't suit people that prefer the security of a fixed rate and knowing what their payments will be each month.
Even if the base rate stays low, borrowers will still face "payment shock" after the first year is up. A jump in the pay rate from 2.29% to 3.79% would cost borrowers with a £200,000 loan an extra £156 a month.
Is it worth it?
Although a fixed rate of 2.29% might seem attractive, the fact that after the first year the rate reverts to a tracker at 2.29% above base would put me off applying for this mortgage. Borrowers are tied in for three years altogether and the danger of getting tied in to tracker deals is that you're at the mercy of the Bank of England. If rates go up in the future your pay rate could shoot up, and you'll either have to pay up or pay to get out and remortgage to a better deal.
Borrowers looking for a fixed rate would, in my opinion, be better off committing to a low two or three-year fix while those preferring a tracker should look for one with no early repayment charges.