“HSBC deal raises hopes of mortgage price war,” screamed a headline in The Times last week. But any hopes that this deal will result in a flood of cheap and easy mortgages hitting the market are likely to be dashed.
In a smart move designed to grab publicity, HSBC – the UK’s biggest net mortgage lender in the first half of 2009 – has announced a new two-year deal offering borrowers an initial rate of just 1.99%. Given that the closest two-year fix is First Direct’s 3.49% (according to Moneysupermarket.com), the excitement over HSBC’s move is understandable. But as with all financial products, the devil’s in the detail.
First off, the qualification criteria are strict. Borrowers need a deposit, or existing equity (the surplus value of a home above any outstanding mortgage) of at least 40%. If you can’t manage that, then the bank offers an initial rate of 2.49% for those who can rustle up 25% equity, or 3.89% for those with 10%. So this is far from being a mass-market deal. In short, HSBC is simply looking to cherry-pick the best borrowers, and expand its market share at the expense of credit-crunched rivals, while the lending market is tight.
Next, the 1.99% rate is not all it seems. It represents a fixed discount of 1.95% to HSBC’s existing standard variable rate (SVR). This is currently sitting at 3.94%. There are two potential traps lurking here. Because the initial rate is linked to the bank’s own variable rate, and not the Bank of England’s base rate (currently 0.5%), HSBC is free to change it at will, at any time, regardless of what happens to the base rate.
Even if the rate stays at around 1.99% for the next two years, it then reverts to their standard variable rate, meaning that anyone who takes this deal will need to be ready to switch.
Meanwhile, HSBC will levy a juicy £1,199 fee in order to arrange the deal. Again, that’s not great news for cash-poor borrowers given that you may be paying a similar, or even higher, fee again should you need to move provider to secure a better rate after the initial two-year discount period. It also pushes up the effective rate you pay – the ‘cost for comparison’ when you factor this in is quoted on HSBC’s website as 3.7%.
Lastly, even if you are happy with these caveats, you’ll have to hurry to secure the deal. As with all headline-grabbing financial offers, it’s first come, first served. Processing the flood of applications these deals generate takes time and could even cause your purchase to fall through if you don’t get the nod from HSBC fast enough.
So, yes, as David Hollingsworth of mortgage broker London and Country notes, “this deal offers an extremely eye-catching rate and there really is no direct competition”. But given that only a small number of borrowers will be able to take advantage; plus the fact that the allocated funds will be snapped up fast; and bearing in mind that HSBC is in much stronger financial position than most rivals, don’t assume this deal is a sign that the mortgage floodgates will reopen any time soon.