The Perfect Mortgage? Maybe...

Posted on 6 July 2011 by Drew

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John Charcol has launched a ground-breaking new "track and fix" mortgage that is the perfect answer to the current uncertainty on the future movement of interest rates. The mortgage initially tracks Bank Rate for 2 years (until 31/8/13) and then moves to a fixed rate for the next 3 years. 

It is no exaggeration to say that this is one of the most innovative products that the market has seen for some time and is going to be the perfect fit for many borrowers.  Following the latest smoke signals from the Bank of England most economists no longer expect a Bank Rate increase this year and the discussion now tends to be “will it happen next year and, if so, when?” Even when the first increase arrives the majority view, which we share, is that the rate will only rise slowly but the further ahead one tries to forecast the more difficult it becomes and hence the greater risk of being caught out by some totally unexpected event, or of just simply getting it wrong.

This presents some challenges for the mortgage borrower who likes the security and budgeting certainty provided by a fixed rate but baulks at paying over 1.5% more for a 5 year fixed rate than the initial rate on the best tracker or discount rates. A fixed rate offers little value for most people over the next two years if one accepts it is unlikely Bank Rate will increase much during that period and so at John Charcol we think the ideal solution to this dilemma is to start off with a low tracker rate and switch automatically to a predetermined fixed rate for the next 3 years.

With the great pricing we have achieved on this hybrid mortgage it offers better value than any 5 year fix on the market unless Bank Rate AVERAGES more than 1.75% over the next two years. Not only that but the lower the average rate of Bank Rate over these next 2 years the cheaper this mortgage becomes. It seems unlikely that Bank Rate will remain at 0.5% for the whole of the next 2 years but in that event the average rate on this mortgage over its 5 year term would be 3.31%.

The details of the mortgage, which is available for both purchase and remortgage, are:
Bank Rate + 1.79% to 31/8/13, giving an initial pay rate of 2.29%, followed by a fixed rate of 3.99% until 31/8/16. The overall cost for comparison is 5.1% APR. The maximum LTV is 75% and for mortgages up to £750,000 there is a booking fee payable on application of £95, with a completion fee of £1,900. The maximum loan available is £1.5m and for mortgages above £750,000 up to this size the booking fee is £190 and the completion fee is £3,800. An early repayment charge (ERC) of 5/5/5/4/3% applies during the 5 years but up to 10% p.a. can be repaid ERC free. The mortgage is flexible and any overpayments can be used to take a payment holiday or make underpayments. It is only available on a repayment basis.

Although the fees are relatively high, when amortised over the 5 year term a £1,995 fee is equivalent to a £800 fee on a 2 year deal, but the size of the fee does mean that this mortgage may not be suitable for small mortgages.

The average rate over 5 years on this mortgage at different average levels of Bank Rate will be as follows:
Average Bank Rate Average Mortgage Rate
0.50% 3.31%
0.75% 3.41%
1.00% 3.51%
1.25% 3.61%
1.50% 3.71%
1.75% 3.81%
2.00% 3.91%
2.25% 4.01%
2.50% 4.11%

For borrowers who want maximum flexibility this mortgage is one of the very few with a fixed rate available on an offset basis. On the offset version all the rates are 0.2% higher, with everything else, including the fees, the same. With an offset no ERCs are charged unless the mortgage is redeemed, thus allowing unlimited ERC free overpayments into the linked savings account, which can be withdrawn if and when required. An offset mortgage offers the ultimate in flexibility and for borrowers who will make reasonable use of this feature the slightly higher interest rate will be a price well worth paying.

For borrowers needing more than 75% LTV the mortgage is available up to 85% LTV at the following rates:
Bank Rate + 2.99% to 31/8/13, giving an initial pay rate of 3.49%, followed by a fixed rate of 4.99% until 31/8/16. The overall cost for comparison is 5.2% APR. Up to £750,000 there is a booking fee of £95, with a completion fee of £1,900. The maximum loan available above 75% LTV is £1m and for mortgages above £750,000 up to this size the booking fee is £190 and the completion fee is £3,800. As before the mortgage can be arranged on an offset basis with all the rates being 0.2% higher.

The beauty of the hybrid arrangement compared to what is probably the closest alternative, a droplock mortgage,  is that with the fixed rate element of the pricing set at the outset the borrower knows in advance exactly what fixed rate they will be paying after the initial tracker period. Furthermore because this rate is set at today’s low rates it avoids the risk of the borrower not utilising the droplock option at the right time and hence missing the boat. Another benefit is that there is no additional arrangement fee to pay when switching to the fixed rate, as there is with most droplock mortgages. Yet another benefit of the hybrid is that even if the property value fell there is no risk that the lender would reassess the LTV at the time of a required switch to a fixed rate and decline to allow the switch, or charge a higher rate, because the LTV had crossed a threshold level.

To discuss whether this product is right for you, call on the number above.

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