Northern Rock's Fix and Track really a nasty Fixed rate with Extended ERCs
Posted on 25 June 2007 by
Northern Rock today launched three mortgages with extended early repayment charges (ERCs), although because they know full well that any product with extended ERCs will be ignored by most brokers and castigated in the media they have tried to hide the extended ERCs by euphemistically labelling the mortgages “Fix and Track”.
Northern Rock are offering 3 flexible mortgages, all with a fixed rate of 4.99% for the initial period, available up to 85% LTV with a fee of £1,995 and a cashback of £700. The deals are for 1½ years with a 1½ year extended ERC, 2 years with a 2 year extended and 3 years with a 2 year extended ERC, although, as is standard with Northern Rock, unlimited ERC free part repayments can be made. The ERC of 4% based on the original loan is only payable if the mortgage is redeemed in full, but the cashback also has to be repaid on purchases if the mortgage is redeemed within 3½ years and on remortgages redeemed within 1½ years.
As there is no specific definition for “fix and track” technically a lender could argue that any fixed rate mortgage which reverts to a tracker rate, as opposed to SVR or a discount off SVR, is a “fix and track.” However, in my view to justify this terminology the tracker rate should have a reasonably low margin over Bank Rate. How low is “reasonably low” is difficult to be precise about but Northern Rock’s tracker rate on these mortgages is Bank Rate + 1.99%, which is only 0.1% below their SVR, and so it certainly wouldn’t qualify.
On the other hand the tracker rate on Woolwich’s recently launched “fix and track” mortgage is far lower at Bank Rate + 0.39% and although Woolwich’s initial fixed rate is higher @ 5.39%, and their mortgage is not as flexible, their arrangement fee is much lower at £595 and on remortgages Woolwich offer a free valuation and free legals. In addition Woolwich’s ERC is only 1% and their mortgage also benefits from offering a droplock facility whilst on the tracker rate. This means borrowers have the option of switching onto any fixed rate Woolwich are offering without paying the ERC.
Northern Rock’s email to brokers advising of their new “fix and track” mortgages includes some spin that even Alastair Campbell would be proud of, that is assuming he knows anything about mortgages. It says:
· Flexible Fix and Track could provide an excellent option for your clients who wish to keep their monthly payments as low as possible during the current high interest rate environment – this could include clients maturing from fixed rate products with rates below 5%, and who want to keep their repayments at the level they are used to for a period of time.
Although the FSA doesn’t require lenders’ communications to brokers to comply with their requirements for consumer financial promotions to be “clear, fair and not misleading” and “balanced” I believe it is a good discipline for lenders to follow this general principle, without worrying about the risk warning or the APR, as brokers will be aware of the former and the latter is meaningless in most cases. A more balanced communication to brokers on these products might read:
· Flexible Fix and Track provides an option for your clients who wish to keep their monthly payments as low as possible for a limited period, perhaps because they are coming off a sub 5% fixed rate. However, this option has both a high arrangement fee and will lock your client into a high tracker rate for 1½ to 2 years, during which time Bank Rate could be at a significantly different level to today’s rate. If Bank Rate doesn’t fall but is just 1% higher at the end of the fixed rate period your clients who chose one of these 4.99% fixed rates because they couldn’t (or didn’t want to) afford a mortgage only about 0.5% higher in exchange for not having extended ERCs, would see their rate rise from 4.99% to 8.49%. If a rate of around 5½% was unaffordable today, 8.49% will almost certainly be unaffordable and the only way to avoid it and switch onto a cheaper rate will be to pay the 4% ERC.
2 and 3 year fixed rates with no extended ERCs and a lower arrangement fee are currently available only about ½% above 4.99%. For example Cheshire B S offer a flexible 2 year fix at 5.49% and a 3 year fix at 5.6%, both with a £899 fee, up to 90% LTV with no Higher Lending Charge and with a free valuation. For movers Abbey’s 5.34% 2 year fix with no arrangement fee, a free valuation and free legals on both the sale and purchase offers superb value, despite having an extended ERC. This is because the ERC is less than 1% and the trick in this case is to redeem the mortgage at the end of the fixed rate period and pay the ERC, which makes the effective rate about 5.75%.
Northern Rock are often very innovative but in this case they appear to have decided that the Woolwich “fix and track” was worth copying but forgotten that if you are going to copy something you should aim to offer something better, otherwise why bother.
Categories: Mortgages, Personal finance, House and home, Interest rates
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