Yorkshire Building Society has sliced its best-buy mortgage rates and is now offering the cheapest deal anywhere – a two-year discount rate of just 0.97 per cent.
The deal, which is available through the society’s broker arm Accord Mortgages, is on offer to those with a 40 per cent deposit or equity and comes with a hefty £1,495 fee.
Unlike a fixed rate offering the security of stable payments, this mortgage tracks the building society’s standard variable rate (SVR) – currently 4.99 per cent.
This means that if the base rate rises – which has been tipped as likely to happen in May – Yorkshire BS is entitled to hike its SVR by the same amount, pushing up how much you owe each month.
Also important to note is that because it tracks the lender’s SVR and not the base rate, Yorkshire BS is within its rights to change the SVR irrespective of what the Bank of England does.
So should you take a gamble to benefit from the lowest monthly repayments possible in today’s market?
Or is it just a gimmick to woo you in, only to lump you with rising payments in a few months? We take a look.
Yorkshire’s discounted rate is the cheapest on the market at the moment at just 0.97 per cent
What is Yorkshire BS offering?
Unlike the lender’s other discount rates, this deal is completely bells-and-whistles-free so you’ll be paying for the valuation and legal fees on top.
The rate may also be eye-catching, but it comes with an expensive fee. While you can choose to roll this into the total amount borrowed, remember that this means you’ll be paying interest on it too, making the loan more expensive than it might seem.
To get a true sense of the cost of any mortgage, you need to consider both the rate and the fee. You can do this using our true cost mortgage calculator here.
On this deal, borrowing £120,000 over 25 years would mean that monthly repayments would be £451 while the cost of the mortgage over the initial two-year period would be £12,310.
If the base rate rises by 0.25 per cent at next month’s Monetary Policy Committee meeting, as anticipated, the Yorkshire BS discount rate will most likely also rise by this much, putting the new rate at 1.22 per cent.
On the same mortgage as above, this would mean monthly repayments rose by £13 to £464.
Jonathan Harris, director of mortgage broker Anderson Harris, said: ‘Discounted mortgage rates linked to the lender’s standard variable rate have largely fallen from favour, with borrowers preferring the transparency of a base-rate tracker which can only move in line with base rate, not at the lender’s discretion. Currently, most borrowers are favouring fixed rates because of the threat of an interest rate rise.
‘While these discounted rates are cheaper than the lowest priced fixed rates on the market, that is because they offer no protection from a rate rise.
‘So it depends on the sort of person you are – if you would struggle to pay the mortgage if interest rates were to rise, then you would be better off with a more expensive fixed-rate deal. However, if that is not the case, you may prefer the cheaper initial payments and not worry too much about the potential of a base rate rise.’
How does the deal compare?
The closest two-year discount rate is 0.99 per cent with a £1,449 fee from Clydesdale Bank, which would incur a monthly repayment of £452.
This compares to the cheapest two-year fixed rate which is currently 1.29 per cent from Chelsea Building Society with a £1,900 fee.
Monthly repayments on the same £120,000 as above would be £468 – £17 more a month than the YBS discount rate deal and £16 more than the Clydesdale deal.
This is Money verdict
When you take a variable rate – which includes a discount rate as well as tracker mortgages – you’re taking a gamble that rates will only rise by as much as you can afford.
The upside to this gamble is that rates tend to be cheaper than for fixed deals, as with the latter you’re paying for the privilege of knowing what your monthly payments will be for the duration of the deal period.
The downside to discount and tracker rates is that if the Bank of England does hike the base rate next month, you will see your payments rise.
That said, a small 0.25 per cent rise might be something you think you can afford to absorb given that it’s not a sure thing that the Bank will change the base rate.
To alleviate some of the risk, Yorkshire BS has also been clear: ‘Borrowers on discounted SVR mortgages can come out of their deal at any time, with lower costs than their fixed rate equivalents.
‘This gives them options to move their mortgage if rates do rise. Therefore our new mortgages will appeal to borrowers looking for flexibility and competitive monthly repayments over a short period.’
The markets are expecting rates to rise this year, possibly more than once and this is already pushing up lenders’ funding costs.
This rate is the lowest on the market at the moment – and if the punters are to be believed, then it’s likely that you’re not going to find cheaper any time soon.
True cost mortgage calculator
This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.