A 1% mortgage rate is pretty cheap. What's the catch?

Look carefully before leaping at the new mortgage deals. You can't change your mind later on. By James Hipwell

You've seen the advertisements for cars and electrical appliances offering interest-free credit or '0 per cent finance'. The mortgage market is heading the same way,with several lenders offering actual pay-back rates at under 1 per cent, usually for six months or a year.

With Bank of Ireland Mortgages, borrowers can fix their rate at 0.99 per cent until 1 October 1996 so the savings in that first year would be enormous. However, Stephen Dilworth, head of corporate affairs, says: "Borrowers would be wise to budget for full rate payments from the start and put any savings into an account. This will get them used to the monthly commitment but still allow them to benefit from the low rate."

Another low fixed rate is available from Bristol & West Building Society. Borrowers can peg their rate at 0.95 per cent until the end of November 1996. Providing they don't want to borrow more than 90 per cent of the property's value, borrowers can fix their rate at 0.70 per cent for the same period.

Scarborough Building Society's Three Step Two Year Discount Mortgage lets borrowers pay back their loan at 0.75 per cent for six months, then 5.99 per cent for another six months, then 7.49 for a further year.

If you have a sizeable deposit to put down, savings will be greater. The Hinckley & Rugby Building Society currently offers a fixed rate of 0.75 per cent until 1 September 1996 - but only if you have a 30 per cent deposit.

But what are the potential pitfalls of such cheap mortgages? Many lenders will demand that you take their buildings insurance, and you may be forced to take contents insurance or even a life policy through the building society or bank to qualify. Another consideration is the fees and charges, legal, search and survey fees that apply to remortgages and new borrowers.

Considering it takes weeks and months before most mortgages reach the completion stage (even for remortgages when the borrower isn't moving home), a cut-price loan for a guaranteed number of months may last longer than one running to a certain date.

Clearly, lenders can't afford to provide amazing discounts or fixed-rate mortgages and then see their borrowers walk away the moment it has run out. Often, three or four months' gross interest is charged during the first three to five years of the loan. So, if you're mortgage shopping you can expect to be offered a cut-price deal but make sure you examine every deal with a healthy degree of suspicion. Even in the mortgage market you can be sold shoddy goods.

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