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Stick or twist

Paul Thomas assesses a hybrid mortgage that allows borrowers to hedge their bets against interest rates

Mortgage brokers believe hybrid products are ideal for borrowers who want to take advantage of record low interest rates but shield themselves when rates rise.

Accord Mortgages has developed a tracker-to-fixed hybrid product that offers borrowers a two-year tracker period starting from base rate plus 1.69 per cent followed by a three-year fixed-rate period starting from 3.64 per cent. It is available up to 85 per cent loan to value and for a £1,995 fee.

It was initially developed in March with Concordia, the London-based distribution group that disbanded earlier this month. The product was rolled out to the rest of the lender’s distribution partners last week.

Capital Fortune managing director Rob Killeen says: “It is a great idea, effectively allowing customers to hedge their bets in relation to interest rates. They can benefit from a tracker and if interest rates move against them, they would not suffer a significant amount of pain for a significant period of time.”

’This is a product for the current time but it is not going to be appropriate forever. It is down to lenders to come up with these innovative products but, equally, brokers will not sell a product that does not make sense’

According to Moneyfacts.co.uk, the average five-year fixed rate at 75 per cent LTV is currently 4.66 per cent, whereas the hybrid averages out at 3.06 per cent over the five years if the base rate stays where it is during the tracker period.

It is not certain when interest rates will go up but London & Country head of communications David Hollingworth says even if the base rate increases in the near future, the hybrid still looks like a good deal.

He says: “If you make assumptions of base going up by 2 per cent tomorrow, the average rate looks pretty good against any five-year deal.
“But it is not going to be for everyone. Some people will want a straight tracker and some will want a straightforward fixed rate. But I think it is an interesting product and it is very well priced.”

However, he notes the product might be more suited to borrowers with bigger mortgages due to the £1,995 fee. Chadney Bulgin mortgage partner Jonathan Clark believes the product may stimulate the market.

He says: “I cannot see any holes in it. It is an innovative mix I have not seen before and you may well get other lenders mimicking it.”

But SPF Private Clients managing director Mark Harris, who helped develop the product, says it is more likely that smaller lenders would offer it.

He says: “Accord is better placed to react to a product like this than the likes of Santander, Woolwich or Halifax. These smaller lenders can adapt and create products that bit quicker. The more lenders can innovate, the better. It is what the market is lacking.”

John Charcol senior technical manager Ray Boulger says the product is good for the current interest rate environment but would not be useful if interest rates were falling.

He says: “This is definitely a product for the current time but it is not going to be appropriate forever. It is down to lenders to come up with these innovative products but, equally, brokers will not sell a product that does not make sense.”

Capped trackers and drop-lock mortgages provide alternatives to Accord’s hybrid. Capped trackers offer borrowers the reassurance of knowing their repayments will be capped at a certain level, no matter how high the base rate increases.

But Hollingworth notes it is rare that borrowers will get the best rate available with capped trackers.

He says: “They claim to offer the best of both worlds. You are tracking but you know how high it will go. The downside is it is not going to be the cheapest tracker. And the cap will not be equal to the cheapest fixed rate.”

Drop-lock mortgages, on the other hand, allow borrowers to choose when they want to switch off their tracker mortgage onto a fixed rate.
Clark says borrowers rarely get the opportunity to reserve a fixed rate at the outset when they first take out their tracker. This means the lender’s fixed rates could end up being better or worse in the future when the borrower decides to switch off their tracker.

He says: “The problem with drop-locks is it’s all very well telling the client the concept but the first thing clients ask is what are the lender’s fixed rates like at the moment. Who is to say that product will be available in six months or a year’s time.”

Boulger adds there is a risk with drop-locks that consumers will switch to a fixed-rate product at the wrong time.

He says: “With a droplock, it is down to you to make that choice to fix and you have to be careful because most people will miss the boat and not fix at the right time. This is where brokers can help.”

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