Simon Read: Those cheap home loans may be built on shaky foundations

You should ignore the headline offers and trickery and work out the total cost of borrowing under different deals

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A mortgage with interest charged at less than 1 per cent would have been a laughable notion just a few years ago.

On Monday it will become a reality as HSBC becomes the latest lender to join the intensifying mortgage war.

To get that low rate – in fact it’s 0.99 per cent – you’ll need a hefty deposit of at least 40 per cent of the value of the property. You’ll also have to stump up a fairly hefty arrangement fee of £1,999, which makes the deal a lot less attractive, depending on how much you borrow and for how long.

The deal is the latest salvo in what is set to become a fierce mortgage fight as we approach Christmas. Now that the complicated new mortgage lending rules introduced in April have bedded in, lenders are more likely to advance money and, indeed, are keener to do so.

That means interest rates will get lower and gimmicks will multiply as lenders seek to attract borrowers. But don’t be fooled into thinking that means rushing to get a good deal; they are unlikely to be as good as lenders try and pretend they are.

Take HSBC’s 0.99 per cent offer. It’s actually a two-year discount of 2.95 per cent off the bank’s standard variable rate. After 24 months, then, the rate, if it stays the same, would end up at 3.94 per cent.

However, rates are expected to start to rise from next May, after the general election, and the Governor of the Bank of England has predicted that the base rate will eventually climb from its current level of 0.5 per cent to around 3 per cent.

Where would that leave your 0.99 per cent mortgage?  If it mirrored the expected base rate rises, it would climb to 6.44 per cent, and that’s a far less attractive deal.

In short, you should ignore the headline offers and trickery and work out the total cost of borrowing under different deals. Only then will you know whether you’re signing up to a good deal, or locking yourself into an expensive mistake.

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