Beware the seven-year hitch with long-term mortgage deals
Locking in to loans can be a problem if homebuyers move again before the time is up, says Jeff Salway
FIRST-TIME buyers will receive a rare boost this week as one of the UK’s biggest lenders launches a new range of home loans that includes the cheapest long-term deal on record.
HSBC yesterday unveiled a seven-year mortgage requiring just a 10 per cent deposit, in a bid to tempt first-timers into locking in for the long term. But while experts have welcomed the move as a much-needed fillip for neglected first-time buyers, they warn that many people applying for the loan can expect to be turned away.
The launch comes on the back of a rate war as high-street lenders slash the cost of their fixed-rate mortgages. These new cheap deals are available only to those with a deposit or equity of around 40 per cent, leaving first-time buyers paying at least twice as much.
HSBC’s gambit appears to deliver a timely shot in the arm for first-time buyers – the lifeblood of the housing market.
Its new seven-year 90 per cent loan-to-value (LTV) mortgage, available from tomorrow, comes with a rate of 4.89 per cent. It becomes the cheapest seven-year rate on record, edging out the 5.14 per cent loan launched by Chelsea Building Society earlier this year. There are no booking, completion or standard valuation fees for homebuyers.
The lender has also introduced 4.89 per cent mortgages at 90 per cent LTV over two, three and five years, plus a 4.49 per cent fee-free lifetime tracker at 90 per cent LTV.
Peter Dockar, head of mortgages at HSBC, said: “We have consistently offered competitive rates on our mortgages and these latest products offer first-time buyers the helping hand they need to get onto the property ladder with a market-leading rate and no upfront fees.”
The new loans are part of HSBC’s commitment to make at least £4 billion available to first-time buyers in 2012.
But Michael Maloco, of Dunfermline-based Maloco & Associates, pointed out that making that funding available is not the same as actually lending it.
“As ever, the devil will be in the detail – in particular the application of lending criteria,” he said.
“Too often over these last few years we have seen headline-grabbing rates and deals which in reality [have] very restrictive parameters.”
HSBC is currently setting the pace in terms of lending and deals, said Maloco. But he queried whether the new loans really would be fee-free for some borrowers, given that the lender only deals with a small panel of solicitors. This means borrowers often pay one fee to their own solicitor and one to HSBC’s appointed agent, according to Maloco.
“The cumulative effect is always a greater cost to the borrower. If all first-time buyers are railroaded down the track of using only HSBC’s chosen firms then there are questions of independence and freedom of choice,” he said.
He added: “I tend to think the fees-free aspect of the product will be heavily conditioned.”
But what of the actual deals? Should first-time buyers be tying in for seven years? Are the rates attractive?
Mark Harris, chief executive of mortgage broker SPF Private Clients, welcomed the arrival of new loans for first-time buyers. However, he believes that while there is merit in taking a seven-year fix, the length of the term will also prove a deterrent.
“Seven years is a long time to fix and may put many first-time buyers off, particularly when there are early repayment charges,” he said.
“Many first-time buyers typically plan to move on again before that length of time elapses, ideally to a bigger home where they can bring up a family, so make sure you don’t fix for longer than you are absolutely sure about.”
He recommended that borrowers clarify, before signing on the dotted line, whether HSBC will let them take the mortgage with them when they move.
“There are no guarantees that the mortgage will be portable so you can take it with you; and if it isn’t, there may be a hefty early repayment charge to pay,” he added.
However, the rates HSBC has come up with are competitive, Harris confirmed. “There are cheaper deals on two and three-year fixes at 90 per cent LTV from Nottingham BS at 4.79 per cent with £299 fee for two years or Hanley’s three-year fix at 4.29 per cent, although this has a £900 fee.”
Working out whether the seven-year rate is a good offer is less straightforward, principally because deals of that length are rare.
Skipton Building Society has a seven-year fix at 4.89 per cent with a £995 fee, said Harris, but this requires a 15 per cent downpayment.
Yet the time is ripe for longer-term mortgages, given the low base rate – at 0.5 per cent since March 2009 – and there’s little expectation of it increasing significantly over the next couple of years.
Some of the most eye-catching new mortgages of recent months have been over five-year terms, although these are typically aimed at borrowers with substantial equity or deposits.
HSBC’s new product now gives first-time buyers the opportunity to secure peace of mind for a few years, knowing they’re insulated against dramatic repayment increases.
But is seven years too long? Maloco thinks it may be for most people.
“My own personal feeling is that three and five years are better options, and that seven years in the typical UK economic cycle is maybe just a little too far. That said, the rate is not punitive by any means and for many the certainty will offer solace,” he said.
Such solace may be especially relevant to the average first-time buyer, Maloco noted, given they may be more likely, once they have secured their home, to experience life events such as the birth of children.
“The peace of mind afforded by at least one certainty is an attraction to many first-time buyers.”
In short, the appeal of the new seven-year offer may depend on how you value such peace of mind. But do your homework first and make sure your credit record is squeaky clean, because your chances of getting the deal will otherwise be slim.
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