'Cheapest ever' mortgage launched

A new mortgage has laid claim to the title of the UK's cheapest.

In the last two years Bank of England interest rates have risen five times and dropped only once, but yesterday first direct released its cheapest ever mortgage.

Two years ago the UK base rate of interest sank to an all-time low of 3.5 per cent, and mortgage rates fell in turn.

But with base rate one per cent higher than this historic low, first direct, HSBC's direct banking arm, has now brought out its lowest headline rate yet.

The phone and internet bank is offering borrowers the chance to take out a discounted rate mortgage charging just 2.99 per cent - which the bank described as "the lowest rate since Elvis was in short trousers".

The mortgage will remain discounted until May next year - but with many pundits tipping the Bank of England to drop base rate again before then it is entirely possible that the rate paid on the new first direct mortgage will fall below even this low rate.

The deal also offers unlimited overpayments within the term of the discount, after which the loan reverts to first direct's standard variable rate of 5.5 per cent.

It is also possible to offset any positive balances in a customer's savings and current accounts against the value of the loan - cutting repayments further.

However, the short duration of the discount means a customer taking out a longer term discounted rate mortgage could be better off.

While the initial rate on these mortgages is higher than first direct's rate, the discount on other products is continued for at least a year after the first direct discount period ends, seeing overall costs lower for the period of the discount.

However, what first direct does offer is a lower ongoing rate of interest.

At 5.5 per cent the first direct rate is around a per cent cheaper than any of the leading discounted or fixed-rate deals offer on their standard variable rate.

But for customers prepared to switch after the term of their discount or fix, this would appear to be a poorer deal.

By contrast, people simply seeking a low ongoing rate of interest can take out a variable rate mortgage that charges less than five per cent interest for the term of the loan - with some of these also offering offset or flexible packages.

What first direct's deal genuinely offers is the option for an outstandingly low initial rate - with the possibility that this will fall even lower in upcoming months - and the ability to overpay during this period, letting borrowers take advantage of the low rate to a greater extent than the short period of the discount implies