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Product matters

It is always difficult to come up with original new ideas when designing new mortgage products. Many are reshaped from a historical template.

The new US Federal Reserve tracker mortgage from Charcol, although revamped from their previous version, is a very interesting proposition.

A number of consumers are beginning to enquire about euro-style mortgages and, while the actual take-up is low, not many will have come across this US version in sterling.

In essence it is a sixmonth 2.99 per cent fixed rate to January 1, 2003 and then for five years it tracks US three-month Libor, currently 1.9 per cent, with a margin of 1.2 per cent, making the payment rate 3.1 per cent.

Compared with the Bank of England base rate of 4 per cent and UK Libor of 4.14 per cent, it would take some time to be disadvantaged even if rates went up.

There is a free valuation and borrowers can repay up to 10 per cent of the mortgage without penalty and these overpayments can be used to allow up to six months payment holidays a year if required.

If the predictions of higher interest rates materialise, then the borrower is locked in for five years and would have to pay a 5/5/4/4/3 per cent penalty until January 1, 2008 to redeem.

Products that are currently tracking UK base rate do not generally have a lock-in, leaving the consumer free to switch to another deal if rates increase. However, if rates remain at a similar figure, great savings could be made with this product. The forecasts on US rates predict little change until September.

Sally Laker is managing director of Mortgage Intelligence

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