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Yorkshire BS mortgage offers super-low interest rate of 0.78%… should YOU risk taking a tracker?

A new mortgage from Yorkshire Building Society offers home buyers a market-leading interest rate of just 0.78 per cent, as the cost of borrowing to buy a home continues to hit record lows.

The two-year fixed deal, which is also available to those remortgaging, is a tracker – which means that borrowers would pay the Bank of England base rate, currently 0.10 per cent, plus 0.68 percentage points.

It is only available to borrowers with a 35 per cent deposit, and comes with a £995 fee attached.

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

Tracker mortgages are variable rate deals which track the Bank of England base rate, and add an extra margin on top.

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

After the two-year fixed period, the 0.68 per cent tracking figure also could change.

YBS has also introduced several other new tracker deals, including a 0.89 per cent tracker rate offered to home buyers or those re-mortgaging with a 25 per cent deposit, which also comes with a £995 fee. All of the new products offer free standard valuation. 

It comes amid a mortgage rate war, where lenders have competed to offer ever-lower interest rates to those with large deposits, in order to capitalise on the pandemic-fuelled housing boom.

At the same time, the Bank of England’s base rate is currently at a record low of 0.1 per cent, meaning banks can borrow money cheaply and pass some of those savings on to their customers.

Changes: Borrowers taking out tracker mortgages agree to tie their monthly payments to movements in the Bank of England's base rate – and that could change sooner rather than later

Changes: Borrowers taking out tracker mortgages agree to tie their monthly payments to movements in the Bank of England’s base rate – and that could change sooner rather than later

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

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

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

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

The main benefit is flexibility. Variable rate mortgages such as trackers often have smaller penalties for paying off the loan early, or overpaying.

While some tracker mortgages have no early repayment charges at all, the new YBS products will charge an ERC of 1 per cent of the loan amount if the borrower repays it within the two-year fixed period.

While lower than many fixed-rate mortgages, which commonly have ERCs of 1.5 to 2.5 per cent, this could still be a significant sum.

Katie Brain, banking expert at financial information service Defaqto, says: ‘Rates are at the lowest they have ever been, but the lowest rate may not suit your own personal circumstances. 

‘Trackers are usually suited to someone who wants flexibility, as they typically have no ERCs, and/or no restrictions on overpayments. 

‘But the overpayments are restricted to 10 per cent per year for these YBS products as well as an ERC of 1 per cent within the 2 years,’ she says. 

The lowest fixed rate available for someone with a 40 per cent deposit is currently 0.79 per cent with Platform.  

‘For mortgage amounts over £200,000 the 0.78 per cent tracker with YBS could be a good option, as when compared to the lowest two year fixed-rate available at 60 per cent Platform 0.79 per cent, there is a much higher fee of £1,499,’ Brain adds.   

‘But this is only a good idea if you are willing to take the risk of interest rates going up, as monthly payments will increase.’

Finding a deal  with a higher interest rate but without an arrangement fee could be even cheaper overall, as our table below shows. 

The main downside of taking a tracker right now is that the base rate could change relatively soon.  

Those looking to pay off their home loan early may do well to look at a tracker, as they often have lower penalties than fixed mortgages - and in some cases none at all

Those looking to pay off their home loan early may do well to look at a tracker, as they often have lower penalties than fixed mortgages – and in some cases none at all 

Nicholas Mendes, mortgage technical manager at John Charcol, points out that someone applying for the YBS rate now may find that their interest rate increases even before their first payment. 

‘With a bank rate increase likely early next year, and possibly as early as December, any borrower who takes this mortgage, especially for a purchase, may never actually pay this rate. 

‘The bank rate is almost certain to increase [further] over the next 2 years, which would also be worthwhile factoring in.

‘There are products with no ERCs available on the market which may be more suitable if you are looking for more flexibility.’

He suggests homeowners speak to an independent, whole-of-market mortgage broker to make sure they are getting the right product for their needs.  

Are tracker rates really the cheapest? 

This is Money looked at the best tracker mortgages on the market right now, taking into account any fees to tot up the total annual cost. 

For someone buying a £250,000 home with a 35 per cent deposit, YBS’s 0.78 per cent rate comes in second – following a Barclays tracker which has a much higher rate, but no fees.  

Provider  Tracker or fixed  Tracker details Initial rate  Fees  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 
Nationwide  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  Base + 0.68%  0.78%  £995  £7,654 
Source: L&C/This is Money mortgage tool 

That deal also has a 1 per cent ERC. The best tracker for a borrower looking to pay off their loan early could be Barclays’ base rate + 0.85% product with a £999 fee, which carries no ERCs and has an annual repayment of £7,805. 

But for a borrower not intending to repay early, a fixed mortgage could still be a better option. 

The same borrower would pay £150 less annually if they opted for a two-year fixed deal with Santander. 

The initial rate of 1.14 per cent with no fees would mean an annual payment of £7,473.

There are also a host of other deals that would work out cheaper annually than the YBS 0.78 per cent mortgage, from lenders such as Coventry Building Society, Nationwide, Natwest – and even YBS’s own fixed product. 

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