Fix & Track
A bright new type of mortgage deal could help you to beat the rate rises. Donna Werbner reports
Torn between a fixed rate and a variable rate mortgage? You have reason to be.
Interest rates have been rising steadily since August last year, which makes fixed products attractive, as they protect you from any rate hikes by fixing your payments at a set level . On the other hand, many experts believe interest rates are nearing a peak and will start to come down within the next 12 months. Unlike a fixed rate, if you took out a variable rate you’d benefit from any fall in rates.
Some mortgage lenders like Woolwich, Alliance & Leicester, and Norwich & Peterborough Building Society have recognised the dilemma that many borrowers are facing right now and have come up with a compromise: a mortgage with relatively low fees that is fixed for a year (see table), before reverting to a tracker for two years.
This appears to give you the best of both worlds: fixed payments for the next 12 months, while some believe interest rates will rise, and a variable rate for the following two years, when some experts believe they may go down.
But are these ‘fix and track’ deals really as good as they look?
The price is wrong
While the initial fixed rates are cheap, the tracker rates that these deals then revert to are often expensive. Ray Boulger, senior technical manager at John Charcol, advises: “Avoid any deal which reverts to a tracker that is Base
Rate plus 1.99 per cent, as this will be similar to the lender’s Standard Variable Rate (SVR).”
If you are on an SVR mortgage, you can remortgage at any time without paying penalties. Similarly, many lifetime trackers give you this freedom. But ‘fix and track’ products carry penalties (known as ERCs), usually for around three years, so you will be tied in to the uncompetitive tracker rate as well as the competitive fixed rate.
However, with the Woolwich fix and track deal, after the year-long fixed rate ends, you do have the option to switch into another Woolwich fixed rate, without paying any penalties or exit charges. But you would unfortunately have to pay a new arrangement fee if you chose this option.
The moral of the story? “Don’t go for this product if you can’t afford to pay a higher fixed rate, just because the initial rate of a ‘fix and track’ mortgage looks attractive,” says Boulger.
Tags: fix & track mortgages, Fixed rate mortgages, mortgage, Mortgage news, Mortgage rates, News, Tracker mortgages
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