TSB launches new mortgage for just one year: who should consider it?

TSB offers its mortgage customers the opportunity to conclude a contract for a period of just one year.

Starting tomorrow, the bank will offer a one-year installment to existing mortgage loan customers who want to refinance a new contract under the so-called product transfer.

The annual installment will be available at a rate of 5.95%, meaning someone securing this deal with a £200,000 mortgage would pay £1,282 a month over a 25-year repayment period.

The new TSB product differs from standard ones because most fixed mortgage offers are valid for two, three, five and even 10 years.

However, TSB is not the only company offering borrowers the opportunity to repay their loan for a period of one year.

Precise Mortgages currently offers a no-cost, one-year fixed rate deal of 5.69% for mortgages covering up to 75% of the property value.

Kensington Mortgages also has an annual fixed rate of 6.04% for up to 75% of the loan value, with a fee of £999.

Why is it worth taking out a mortgage loan for a year?

There is no denying that the rates are much higher with these annual fixed rates.

The lowest five-year fixed interest rate for someone needing a mortgage to cover 75 percent of the property's value is currently 3.85 percent.

On a £200,000 mortgage repayment over 25 years, this would equate to £1,039 per month – around £243 less per month than for someone opting for a one-year TSB contract.

Meanwhile, the lowest two-year rate is 4.04%. This would mean £1,060 per month and £222 less per month than the annual TSB contract.

Nicholas Mendes, technical mortgage manager at broker John Charcol, says that while this is by far the most expensive solution, it may appeal to people looking for flexibility – perhaps because they want to move home next year or because they think interest rates will fall next year.

An alternative option would be to choose a variable rate tracker or apply the standard variable interest rate, which will likely be between 7 and 9 percent, depending on the lender.

“A one-year fixed-rate mortgage may be attractive to borrowers who need short-term certainty and flexibility,” Mendes says.

Locks in a fixed interest rate for one year, ensuring predictable repayments without the potential of being tied to a longer, higher rate.

“Once the agreed period has passed, borrowers are free to re-evaluate their options – whether that is to switch to a different arrangement with TSB or refinance their mortgage with a new lender.

“This short commitment period is ideal for those who want to avoid taking out a long-term mortgage, especially in a market where interest rates are expected to fall.”

However, Mendes admits that the one-year solution involves risks and additional costs.

“After the end of the one-year agreement, borrowers may incur additional refinancing costs, such as transfer and appraisal fees, if they switch to a new lender.

“Furthermore, if interest rates rise after the initial period, the borrower may incur higher costs.”

Although they are falling overall, some lenders have moved to increase mortgage rates in recent days.

Is it better to take out a mortgage on a tracker?

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

Tracker mortgages are based on the Bank of England base rate plus a fixed percentage.

For example, someone might pay the base rate plus 0.75 percent extra using a tracker. At a base rate of 5 percent, they would currently pay 5.75 percent.

Certainty: According to mortgage broker Nicholas Mendes, an annuity offers predictable monthly payments

However, if the base rate were lowered to 4 percent, their rate would drop to 4.75 percent.

The main advantage of tracker offers is that they usually do not involve early repayment fees.

If mortgage rates fall over the coming year or two, someone on a tracker deal will be able to switch to a cheaper fixed deal when they feel the time is right.

While tracker deals are more expensive than fixed rates, they may prove to be a cheaper option than an annual patch.

For example, Halifax currently offers a two-year tracker at 5.08% interest with no down payment with a product fee of £1,499.

“A tracked mortgage would actually be a more cost-effective option, especially given the current market offering,” says Mendes.

“With bank interest rates expected to decline over the next 12 months, albeit gradually, a borrower using the tracker will benefit from lower monthly payments over the next 12 months.

However, trackers are subject to uncertainty, which means payments may fluctuate. As a result, some borrowers may prefer the predictability of a fixed-rate mortgage, even if it is only for one year.

Could more lenders offer annual fixes?

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

“In response to market uncertainty and borrowers' need for flexibility, more lenders may offer these products,” Mendes adds.

“Competition among lenders may further fuel this trend. As the mortgage market becomes increasingly competitive, lenders may seek to attract borrowers by offering short-term, fixed-rate products that meet demand for flexibility and security.