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HSBC’s 1.99% mortgage - Ask our expert

Dear Chris, I just saw on the news that HSBC is offering mortgages at 1.99% interest.

It sounds great, should I switch? It seems very low, but am I missing something?

Best wishes,

David, via email Tuesday 8 September, 2009

On the subject of HSBC’s 1.99% mortgage, our expert says...

Hi David,

Thanks for getting in touch. HSBC’s latest mortgage offer certainly grabbed a lot of headlines last week and with good reason – the interest rate of 1.99% is the lowest we’ve seen on the market for some time and HSBC’s lowest rate ever.

However, this deal isn’t for everyone and there are several catches you need to be aware of, including the following:

1. The deal is only available to borrowers with a 40% deposit – You will only be eligible for HSBC’s super-low rate if you have at least a 40% deposit or equity in your home. This will exclude most home buyers and movers.

2. The interest rate is not fixed – HSBC’s 1.99% mortgage is a discounted variable rate mortgage, which is linked to HSBC’s standard variable rate (SVR). This is perhaps the most crucial point to note, as it means your interest rate and monthly repayments could go up at any time. Lenders can change their SVR whenever they choose, and there’s a risk that when the base rate rises in the future, HSBC will also increase its SVR.

3. The mortgage comes with a £1,199 fee – Compared with most mortgage deals, this fee is pretty large and is equivalent to paying almost £50 extra each month for the two-year deal period. You need to weigh up this high fee and the low interest rate carefully against other deals available to you.

4. Early redemption penalties apply – Variable rate mortgages have the potential to become very expensive in the next few years – after the first two you’ll move on to HSBC’s SVR. If your interest rate does shoot up and you want to switch your mortgage before the two-year deal period ends, you will face an early repayment penalty charge of up to 2% of your outstanding mortgage amount.

As you can see, when you look beyond the headline rate of 1.99%, it’s clear that this deal will not be a great option for everyone. On the other hand, if you have a large deposit and can afford to take the risk of your monthly repayments increasing, it may be suitable for you.

In order to get the best mortgage deal for your circumstances I would recommend that you contact an independent financial adviser.

They will be able to discuss all your options with you and offer advice tailored to your personal situation.

Good luck!