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Product matters

Skipton should be congratulated for

producing a genuinely innovative mortgage with the Manhattan Mortgage,

which, for the financially sophisticated borrower, offers a potentially

competitive rate. It is based on US short-term interest rates but is a

sterling mortgage and there is no currency risk.

Like all other Skipton mortgages, potential borrowers must be aware there

are four rate options. I will take the sub-85 per cent rate with no

insurance as the benchmark, where the rate is US$ three-month Libor + 1.14

per cent for five years.

The key to evaluating this product is what the differential is likely to

be between short-term US and sterling interest rates over the next five

years. The best conventional tracker rates over five years equate to bank

base + 0.5 per cent, with some deals being flexible and/or penalty-free.

Therefore, for this product to deliver a cheaper mortgage, US short-term

interest rates must average 0.75 per cent less than UK rates over the next

five years. Historically, they have normally been lower although in 1999

the differences were small and for most of last year US rates were 0.5 per

cent higher. The current differential is 1.45 per cent.

It is impossible to forecast interest rates five years ahead but this

initially offers a very competitive tracker rate and I think there is a

strong prospect it will deliver good value over five years.

Although it has a heavy early redemption penalty for five years, the 10

per cent a year penalty-free part paydown and payment holiday facilities

will offer enough flexibility for many borrowers.

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