On HSBC’s 2+2=5, when 4.5% means 6.5%

‘Never trust the man who hath reason to suspect that you know he hath’

So HSBC is telling us that they will match any maturing mortgages fixed interest rates to a minimum of 4.5 per cent. The bank’s Asian operations translated in high profits and savings ratios let them make up for the mortgage market share they lost in the last years to more aggressive and less risk-averse financial institutions.

It is just that, shifting worldwide funds from East to West and save the day? Well, a bank is a bank, and it will always be. Their goal is to make money, so let’s be suspicious, a good advise in nature. Let’s focus on the small print.

Require Minimum 20% equity
It is up to the bank who they give their money to, and on what conditions. With the 20 per cent equity requirement we rule out anybody who bought out of the breakneck growth areas, and probably anybody who bought in the last 2 years. Good old mom and pops have a reason to be happy, or do they?

Arrangement Fee charged of as much as £5,000/Fix Match period is for 2 years
Now here is where I find the trick that national media should be stressing, instead of the looks of HSBC as a eleventh hour white knight (I wonder why they don’t). A 2 per cent arrangement fee when a few years ago £200 was the norm.

Let’s say that you don’t have the cash to pay fees and they will gladly add it to your loan amount… let’s see it with an example. Let’s say you have a house valued at the UK average price of roughly £200,000. You are lucky enough to have 20 per cent equity in your property (£40,000) so you need to re-mortgage your £160,000 loan.

That will incur on fees of £3,200 that added to your original loan add  up to £163,200. All in all, the effective minimum rate of interest charged in the first year of the 2 year fix is estimated at 6.5 per cent, which is much higher than the headline grabber rate of 4.5.

And not only that, but if you go ahead and add it up to your loan, supposing you have 20 years left to pay the mortgage and a at a 6 per cent APR, your £3,200 will end up costing you £5,500. And that is not including future fees added to the amount owned overtime.

Effectively, just to make up for the fees, you are betting that the house market  is going up at the very least a 2 per cent in the next two years.

Now, I am not saying that it is a good or bad deal, that will depend on personal and individual circumstances. The Market Oracle estimates that:

[…] the HSBC offer is unlikely to appeal to more than 5% of that market […] Therefore this offer is unlikely to have any significant impact on mortgage borrowers in terms of volume and low rates of interest, the only real winner here is HSBC Bank.

I could not agree more, but as Peter Griffin would say, what really grinds my gears is the complacence and lack of analysis of newspapers and media in general. HSBC is not a saviour, it is a business and THAT should be emphasised on the headlines.

Until tomorrow,

.Calvin