Why would you repair your mortgage for only one 12 months at virtually 6%?

TSB is offering its mortgage customers the ability to fix their deal for just one year.

From tomorrow the bank will offer the one-year fix to existing mortgage customers wanting to refinance to a new deal in what is known as a product transfer.

The one-year fix will be available at a rate of 5.95 per cent, meaning someone securing this deal on a £200,000 mortgage will pay £1,282 a month, based on a 25 year repayment term.

TSB’s new product differs from the norm, as most fixed mortgage deals last for either two, three, five or even 10 years.

However, TSB is not be alone in offering borrowers the chance to fix for one year. 

Currently, Precise Mortgages offers a fee-free one-year fixed-rate deal at 5.69 per cent for mortgages covering up to 75 per cent of a property’s value.

Kensington Mortgages also has a one-year fix at 6.04 per cent for up to 75 per cent loan-to-value, with a £999 fee. 

Why to take a one-year fixed mortgage?

There is no denying that the rates are far higher with these one-year fixed rates.

The lowest five-year fixed rate for someone needing a mortgage to cover 75 per cent of a property’s value is currently 3.85 per cent.

On a £200,000 mortgage being repaid over 25 years, that would equate to £1,039 a month – some £243 less each month than someone opting for the TSB one-year deal. 

Meanwhile, the lowest two-year fix is 4.04 per cent. That would equate to £1,060 a month and £222 less a month than the TSB’s one-year deal.

Nicholas Mendes, mortgage technical manager at broker John Charcol says that while it is far most costly, it may appeal to someone looking for flexibility – perhaps because they want to move home next year or because they believe interest rates will fall over the next year. 

The alternative option would be to either opt for a tracker with a variable rate or to fall onto a standard variable rate, which will likely be between 7 and 9 per cent depending on the lender. 

‘A one-year fixed-rate mortgage can appeal to borrowers who need short-term certainty and flexibility,’ says Mendes.

‘It locks in a fixed rate for a year, providing predictable repayments without potentially being tied into a longer higher rate.

‘After the fixed period ends, borrowers have the freedom to reassess their options—whether that’s switching to another deal with TSB or a remortgage with a new lender. 

‘This short commitment period is ideal for those who want to avoid being tied into a long-term mortgage, especially in a market where interest rates are expected to be falling.’

Mendes concedes, however, that the one-year fix is not without its risks and extra costs.

‘After the one-year deal ends, borrowers may face additional refinancing costs, such as conveyancer fees and valuations, when switching to a new lender. 

‘Moreover, if interest rates rise after the initial period, the borrower could face higher costs.’

While they have been falling on the whole, some lenders have moved to increase mortgage rates in recent days.  

Would it be better to take a tracker mortgage? 

Tracker mortgages are often the product of choice for those hedging their bets on interest rates falling.

Tracker mortgages follow the Bank of England’s base rate, plus a set percentage.

For example, someone could be paying base rate plus 0.75 per cent on top with a tracker. With the base rate at 5 per cent, they’d pay 5.75 per cent at present.

But if the base rate was cut to 4 per cent, their rate would fall to 4.75 per cent.

The main benefit of tracker deals is that they typically don’t come with early repayment charges.

If mortgage rates fell over the coming year or two, someone with a tracker deal could switch to a cheaper fixed deal when they felt it was the right time.

While tracker deals are more expensive than fixed rates, they could prove a cheaper option than a one-year fix.

For example, Halifax is currently offering a 5.08 per cent two-year tracker without early repayment  with a £1,499 product fee.

‘A tracker mortgage would indeed be a more cost-effective option, especially given the market’s current offerings,’ says Mendes. 

‘With bank rate expected to decline over the next 12 months, albeit gradually, a borrower on a tracker would benefit in lower monthly payments over the next 12 months. 

‘Trackers, however, come with uncertainty, meaning payments can fluctuate. As a result some borrowers may prefer the predictability of a fixed-rate mortgage, even if it’s just for one year.’

Could more lenders offer one-year fixes?

Mortgage lenders tend to adapt to changing demand. If they think there is a real appetite for one-year fixes, then don’t be surprised to see more banks and building societies enter this space.

‘In response to market uncertainty and borrowers’ desire for flexibility, more lenders might offer these products,’ adds Mendes.

‘Competition among lenders could further drive this trend. As the mortgage market becomes increasingly competitive, lenders may look to attract borrowers by offering shorter-term fixed-rate products that cater to demand for flexibility and security.’