The Yorkshire BS mortgage offers a very low interest rate of 0.78%… should you take the risk of taking out a tracker?

A new Yorkshire Building Society mortgage offers homebuyers an interest rate of just 0.78%, the best in the market, as the cost of borrowing to buy a home continues to hit record highs.

The two-year fixed deal, which is also available for remortgage, is a tracker – meaning borrowers would pay the Bank of England’s base rate, currently 0.10%, plus 0.68 points percentage.

It is only available to borrowers with a 35% deposit and comes with a fee of £ 995.

Record: Yorkshire Building Society’s 0.78% mortgage is lowest in history

Follow-up mortgages are variable rate agreements that track the base rate of the Bank of England and add an additional margin.

If the base rate falls, the interest rate charged will also fall – even during the fixed period – but if the base rate rises, the interest rate will also rise.

After the fixed two-year period, the 0.68% tracking figure may also change.

YBS has also introduced several other new follow-up offers, including a 0.89% follow-up rate offered to homebuyers or those remortgage with a 25% deposit, which also comes with a fee of £ 995. . All new products offer a free standard evaluation.

It comes in the midst of a mortgage rate war, where lenders have clashed to offer ever lower interest rates to those with large deposits, in order to capitalize on the real estate boom fueled by the pandemic.

At the same time, the Bank of England’s base rate is currently at an all-time high of 0.1%, meaning that banks can borrow money cheaply and pass some of those savings on to their clients.

Changes: Borrowers who take out follow-on mortgages agree to tie their monthly payments to fluctuations in the Bank of England's base rate - and that could change sooner rather than later

Changes: Borrowers who take out follow-on mortgages agree to tie their monthly payments to fluctuations in the Bank of England’s base rate – and that could change sooner rather than later

Most of the offers offered so far have been for fixed rate mortgages, rather than variable rates such as trackers.

Because the base rate is so low, a customer taking out a tracker mortgage would be likely to see their monthly payments stay the same or increase, rather than decrease.

This means that there is little incentive to do so, at least from an interest rate perspective.

So what are the arguments for someone taking out a tracker mortgage right now?

The main advantage is flexibility. Variable rate mortgages such as trackers often have lower penalties for prepayment of the loan or overpayment.

While some follow-on mortgages have no prepayment fees, new YBS products will charge an ERC of 1% of the loan amount if the borrower pays it back within the two-year timeframe.

Although lower than many fixed rate mortgages, which typically have ERCs of 1.5 to 2.5 percent, this could still be a significant sum.

Katie Brain, Banking Expert at Defaqto Financial Information Service, said, “The rates are at their lowest ever, but the lowest rate may not be right for your personal situation.

“Trackers are generally suitable for someone who wants flexibility, as they typically don’t have an ERC and / or overpayment restrictions.

“But overpayments are limited to 10 percent per year for these YBS products as well as an ERC of 1 percent within 2 years,” she says.

The lowest fixed rate available to someone with a 40% deposit is currently 0.79% with Platform.

“For mortgage amounts over £ 200,000, the 0.78% tracker with YBS might be a good option, as compared to the lowest two-year fixed rate available at 60% on the 0.79 platform %, there is a much higher fee of £ 1,499, ‘adds Brain.

“But that’s only a good idea if you’re willing to take the risk of a hike in interest rates, because the monthly payments will go up.”

Finding a deal with a higher interest rate but no arrangement fees could be even cheaper overall, as our table below shows.

The main downside to getting a tracker right now is that the base rate could change quite quickly.

Those looking to prepay their home loan might well turn to a tracker, as they often have lower penalties than fixed mortgages - and in some cases none at all.

Those looking to prepay their home loan might well turn to a tracker, as they often have lower penalties than fixed mortgages – and in some cases none at all.

Nicholas Mendes, technical director of mortgages at John Charcol, points out that a person asking for the YBS rate now may find that their interest rate increases even before their first payment.

“With an increase in the bank rate likely early next year, and possibly as early as December, any borrower who takes out this mortgage, especially on a purchase, might never pay that rate.

‘The discount rate is almost certain to increase [further] over the next 2 years, which should also be taken into account.

“There are non-ERC products available on the market which may be more suitable if you are looking for more flexibility. “

He suggests homeowners go to an independent mortgage broker covering the entire market to make sure they’re getting the right product for their needs.

Are tracker prices really the cheapest?

This is Money has reviewed the best tracking mortgages on the market right now, factoring in fees to top up the total annual cost.

For someone buying a £ 250,000 home with a 35% deposit, YBS’s 0.78% rate comes in second – after a Barclays tracker that has a much higher rate, but at no cost.

THE CHEAPEST TWO YEAR FIXED MORTGAGES FOR A £ 250,000 HOUSE WITH A 35% DEPOSIT
Provider Tracker or fixed Tracker Details Initial rate Costs Annual cost
Santander Fixed 1.14% £ 0 £ 7,473
Barclays Tracker Base + 1.08% 1.18% £ 0 £ 7,509
Barclays Fixed 1.19% £ 0 £ 7,518
Coventry BS Fixed 1.19% £ 0 £ 7,518
Yorkshire BS Fixed 1.06% £ 245 £ 7,525
At national scale Fixed 1.23% £ 0 £ 7,554
Natwest Fixed 1.23% £ 0 £ 7,554
Yorkshire BS Fixed 1.26% £ 0 £ 7,581
Principality BS Fixed 1.28% £ 0 £ 7,599
HSBC Fixed 1.29% £ 0 £ 7,608
Yorkshire BS Tracker Plate + 0.68% 0.78% £ 995 £ 7,654
Source: L & C / This is Money Mortgage Tool

This agreement also has an ERC of 1%. The best tracking tool for a borrower looking to prepay their loan might be Barclays Base Rate + 0.85% produced with a fee of £ 999, which has no ERCs and has an annual repayment of £ 7,805. .

But for a borrower who has no plans to prepay, a fixed mortgage might still be a better option.

The same borrower would pay £ 150 less per year if he opted for a two-year fixed contract with Santander.

The initial rate of 1.14% free of charge would mean an annual payment of £ 7,473.

There are also a slew of other offers that would be cheaper each year than the YBS 0.78% mortgage, from lenders like Coventry Building Society, Nationwide, Natwest – and even YBS’s own fixed product.

Best Mortgages

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