Beware mortgages with a catch

Homeowners need to watch out. Some seemingly attractive mortgage discount rates come with a sting in their tail.

Several lenders are offering discounted interest-rate deals that are pegged to their standard variable rate (SVR) rather than the Bank of England base rate. For example, HSBC is offering a mortgage that charges 1.95% less than its SVR of 3.94% for two years so currently you pay just 1.99%. It is available to borrowers with a 40% deposit and has a £999 arrangement fee.

The problem with this kind of deal is that the rate is likely to rise fast when the base rate rises and, quite likely, by a lot more. "Lenders with an SVR below 4% are desperate to increase rates. I wouldn't be surprised if they rose far more steeply following the first Bank rate move, leaving those with a discounted deal worse off," says Ray Boulger of mortgage broker John Charcol in The Sunday Times. More and more mortgages offer this kind of deal, with 320 available now compared to 162 this time last year, according to analysis by Moneyfacts.

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Don't be fooled by a slip of the pen when it comes to the marketing of this type of product. For example, Coventry building society is promoting its Flexx for Term' mortgage deals, which are linked to its Flexx rate. While this is not being marketed as the lender's SVR, it can also be changed in similar fashion at their discretion.

With both the HSBC and Coventry offers, homeowners could pay a current rate as low as 1.99%. That sounds pretty competitive. But you can get that rate anyway without running the risk of it rising at your lender's whim. For example, FirstDirect offers a two-year tracker deal for homeowners with a 35% deposit that charges 1.49% above the base rate, giving you a rate of 1.99%. This deal arguably carries less risk for homeowners as the rate will only rise fairly steadily and in line with Bank of England policy. However, with the base rate widely expected to rise over the next two years, anyone with this mortgage may still face much higher rates further down the line when the deal ends.

If you'd rather not worry about how fast rates will rise and don't want to switch, go for a five-year fix. The lowest rate around is Chelsea building society's 3.99% you'll need at least a 25% deposit. The £1,995 arrangement fee may put you off if cash is tight. Nationwide has a five-year fix at a higher rate of 4.29%, but with a lower fee of £499. You'll need a larger deposit of 30%. Neither deal comes close to matching SVR-linked 1.99% initial rates, but both offer peace of mind once interest rates rise.