Homebuyers and remortgagers could now pay less than 1% interest with a new mortgage from Leeds Building Society – but is the deal as good as it seems?
The discounted variable-rate mortgage offers an attention-grabbing rate of 0.99% for two years (APRC 4.9%).
However, applicants will need a hefty deposit of 35% or more to access the deal, and this isn’t the only caveat you need to keep in mind.
Which? looks at the new mortgage and explores how it compares to other products on the market.
How Leeds Building Society’s 0.99% mortgage works
The 0.99% deal is a discount mortgage – a variable-rate mortgage which, in this case, tracks the lender’s standard variable rate (SVR) minus 4.7%.
At the moment, Leeds Building Society’s SVR is 5.69%, so you’d pay just 0.99%. But lenders are free to raise or lower their SVRs whenever they like, so your repayments could potentially change from month to month.
The mortgage comes with a hefty upfront fee of £1,999, which pushes up the total cost of the deal to a relatively high APRC of 4.9%.
The deal is only available at a loan-to-value ratio of 65% or less, meaning you’ll need a deposit (or, if you’re remortgaging, equity) of at least 35% to be eligible.
- Find out more: Leeds Building Society mortgage lender review
What happens when the deal expires?
After the first two years, you’ll start paying a 1% discount on the SVR, which at current rates would see your interest jump to 4.69%.
If you were repaying a £200,000 mortgage over 25 years, and all other factors remained unchanged, your payments could escalate from £752 per month to more than £1,133 after the first two years. Although, of course, you’d have paid down some of your debt by this point, so your actual payments would be slightly less.
There are plenty of deals offering a better interest rate than 4.69%, so it may be worth remortgaging after the initial period expires.
- Find out more: finding the best mortgage deals
Should you get a discounted variable-rate mortgage?
Discount mortgages can seem particularly appealing at the moment, with several offering rates that beat comparable fixed-rate mortgages.
But think carefully before signing up for a variable deal in the current environment.
In November 2017, and again in August 2018, the Bank of England raised the base rate by 0.25%, and base rate increases tend to have a knock-on effect on lenders’ SVRs. In fact, since the August base rate increase, 62 out of 80 mortgage lenders (78%) have upped their SVRs, Moneyfacts data shows.
Leeds Building Society last increased its SVR in the wake of the November 2017 base rate hike, leaving it on hold after the August decision. But at 5.69%, Leeds’ SVR is already expensive compared to the industry average of 4.9%.
If you took out Leeds Building Society’s 0.99% mortgage and the base rate rose by the same amount in the next two years, the SVR could potentially climb to 5.94% – dragging up your interest rate to 1.24%. And if it rose a second time, the SVR could climb to 6.19%, leaving you paying 1.49%.
- Find out more: discount mortgages advice guide
Is the base rate likely to rise soon?
Two base rate hikes in the next two years is not outside the realm of possibility.
The Bank of England has signalled it could increase the base rate up to 2% from its current level of 0.75%, though it also said any increases would be at a gradual pace.
Even if the base rate stays the same, lenders can opt to raise their SVR for any other reason they choose. And with Brexit casting a shadow of uncertainty over the market, it’s difficult to predict what the coming two years will bring.
If you’re considering taking out a discounted variable-rate mortgage, use our mortgage interest calculator to see what your repayments would look like if you were moved onto a higher interest rate.
- Find out more: how the Bank of England base rate affects your mortgage
Would you be better off with a fixed-term deal?
At a 65% loan-to-value ratio, you have a number of options for low-rate mortgage deals.
If you’d prefer the certainty of a guaranteed interest rate, the lowest fixed rate available for two years at 65% LTV is also from Leeds Building Society at 1.39% (APRC 4.9%). Like the discount variable-rate mortgage, the arrangement fee is £1,999.
Alternatively, Yorkshire Building Society offers a two-year fixed-rate mortgage for 1.43% at the same LTV. With a more modest arrangement fee of £995, this deal works out more cheaply than the Leeds offer over the life of the mortgage, with an APRC of 4.3%. However, this deal isn’t available to those remortgaging.
These rates are higher than what you might pay for a discounted variable-rate deal, but do offer the peace of mind that your rate would be unaffected by economic changes or base rate hikes.
- Find out more: fixed-rate mortgages