Can't decide between a fixed or variable rate? Now you don't have to
Homeowners struggling to decide whether or not to fix their mortgages may find the answer lies with a new offering from Barclays.
The lender has introduced a new "drop-lock" facility for all its new Woolwich mortgage customers, offering them a halfway house between an attractive variable rate and the certainty of a fixed rate.
Barclays announced the new feature at the same as time as reducing its rates on various deals. The 80 per cent loan to value (LTV) range has been reduced by up to 0.21 percentage points, with the two-year fix dropping from 4.59 per cent to 4.38 per cent. Among these changes, Barclays has said that the drop-lock facility will be available to all new tracker and offset borrowers, including those who opt for its new lifetime tracker offering base plus 3.38 per cent with a £999 application fee, which is also for customers with 80 per cent LTV.
The option to drop lock is undoubtedly a useful one for borrowers. It allows customers wanting a tracker or offset mortgage the flexibility to switch on to a fixed rate loan in the future without having to fork out for an early repayment charge.
"Drop-lock mortgages are a superb option for borrowers keen to take advantage of low variable rates, safe in the knowledge there is no penalty should they wish to switch to a fixed rate," says Mark Posniak, the director of specialist property lender Drawbridge Finance.
If interest rates are to stay at 0.5 per cent for some time – and the influential Item club predicted last week they would stay at historically depressed levels until 2014 – the drop-lock facility could be extremely valuable and takes away some of the panic in picking the right time to fix. Borrowers can go for a cheaper tracker rate now and then switch to a more secure fixed rate when interest rates start creeping up.
"The general consensus among industry experts is that interest rates will remain low for some time yet, but when they do start to rise – which they inevitably will – the drop-lock mortgage will ensure that homeowners can move easily and quickly to a fixed rate deal," says Mr Posniak.
To fix or not to fix is a question all borrowers have to ask themselves at some point, and invariably there is some element of risk with either decision. Some will seek the security of a fix no matter what the rate, but then risk overpaying while interest rates are low. Others gamble on a variable rate deal in the hope that rates remain low, but could come unstuck if rates rise quickly and they miss out on cheaper fixes now.
Barclays' move could see other lenders following suit. In September 2008, Halifax offered Rate Guard to borrowers opting for any of its tracker mortgages by allowing them to switch to one of the bank's fixed-rate products within the first 12 months. Other major lenders including Lloyds Banking Group and NatWest as well as a handful of building societies have also previously offered drop-lock facilities, but these fell away last year. Nationwide, which advertised a switch-and-fix feature, now offers this facility only to existing customers.
"It is quite possible that others will introduce drop locks and I also expect to see rather more capped rate products being introduced," says David Black, a banking expert at analysts Defaqto.
While increased flexibility is a beneficial option for many borrowers, opting for a drop-lock deal isn't entirely without risk. If other lenders do start introducing this facility, there are pitfalls to be aware of.
Firstly, you may still have to pay hefty arrangement fees on the new product when you do decide to switch. There could also be some restraints on which products you can switch to, so always check before signing up that you can move over to any of that lender's fixed deals and aren't restricted to just one product which may not be competitive.
With only two lenders offering this flexibility at the moment, you may also find that you're paying over the odds for the privilege. At 70 per cent LTV, Barclays offers Woolwich lifetime tracker loans ranging between base rate plus 2.39 per cent and base rate plus 2.79 per cent, depending on the size of the loan. However, for borrowers with the same deposit, Santander offers a two-year tracker at base rate plus 2.09 per cent with a £995 fee.
Timing is also crucial. If you're expecting interest rates to fall or remain low and fixed rates are looking expensive, a drop lock loan may well be a good option, But when interest rates rise, you can expect your lender's fixed rate deals to rise too and you could miss out on a cheaper long-term fix now.
"There is no guarantee that, at the time of switching, fixed rates available from the lender will be the most attractive. For some borrowers, a fixed rate product from day one would be a better option," says Andrew Montlake, the director of independent mortgage broker Coreco.
Andrew Montlake, Coreco
'The flexibility of drop locks on variable rate mortgages are clearly advantageous, enabling borrowers to have their cake and eat it. They can enjoy the benefits of a low tracker product while interest rates stay low and escape to the sanctuary of a fixed rate when they believe that rates are going to rise to an uncomfortable level.'