The new 'best of both worlds' mortgage rate

One lender has unveiled a mortgage which is both a fixed rate AND a tracker. Will it put an end to interest rate anxiety, or is it just a mortgage rate gimmick?

The biggest dilemma facing mortgage borrowers is always whether to fix the rate of interest you pay or take a risk on tracking the Bank of England base rate in the hope of paying less of a premium. but HSBC has this week launched a new home loan it claims offers borrowers ‘the best of both worlds’.

Time for a split

The new Split Loan Mortgage offers the ability to both fix your mortgage rate and take out a tracker allowing unlimited overpayments, with the total loan split between the two.

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Borrowers can choose to fix 25%, 50% or 75% of their total loan for two years with the rest set up as a lifetime tracker following the base rate.

The ‘split mortgage’ isn’t new - lenders including Santander, Halifax and Nationwide offer similar deals of their own. Where this mortgage differs is that borrowers pay just one headline rate of interest, on both the fixed and tracker portion (at least to begin with) and the deal comes with a single booking fee of £999.

The mortgage is available to borrowers with either a 20% or 30% deposit, with the rate of interest varying from 2.49% to 3.89% depending on how much of the loan is fixed and the level of equity being put down.

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Why mix and match?

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HSBC’s selling point is that the new loan allows borrowers to hedge their bets before deciding whether to fix or not - and the current interest rate outlook is anything but certain. Obviously with the base rate at a record low of 0.5%, the only way it can move is upwards - but by how far and how fast is currently in question.

Following this month’s shock inflation surge that saw the CPI index hit 3.4%, minutes from the Bank of England’s MPC rate setters express increasing worries over inflation that could see interest rates rise imminently. Some economists, including Deloitte sage Roger Bootle, predict the Bank will keep rates ultra-low to support growth as the incoming Government tackles the ballooning national debt – but neither outcome is certain.

So, being able to hedge your bets is a valuable option - and the HSBC deal has a couple of other winning features too. Borrowers can pay the booking fee now and wait up to six months to take out the loan, while it also allows unlimited overpayments on the variable part of the loan - but how does it compare to the best buy deals elsewhere on the market?

• Read this blog: Should you get a fixed rate or a tracker?

How it compares

The rate on the HSBC varies according to both the size of the initial deposit and the proportion of the loan which is fixed. The cheapest deal is available at 2.49% for borrowers with a 30% deposit who fix 25% of the loan – this deal rises to 2.99% if 75% of the mortgage is fixed.

For borrowers who want greater peace of mind, there are two-year fixed rate deals available at the same rate from both Woolwich and HSBC. The Woolwich has a best buy two-year fix at 2.98% for borrowers with a deposit of 30% or more – but this does come with a hefty £1,999 fee.

Elsewhere, the Mansfield Building Society is offering a two-year fix 3.09% with the same £999 fee (and up to 75% LTV), and HSBC has a 2.99% fix with a £999 fee on 70% loan-to-value.

For borrowers with a greater appetite for risk, the 2.49% HSBC deal compares favourably with the best tracker deals currently on the market - the ING Direct Base +1.99 currently charging 2.49% interest on 60% loan-to-value, though the Yorkshire Building Society offers a +1.99% mortgage up to 75% loan-to-value, with £995 in fees.

• Watch this video: How to...slash the cost of your mortgage payments

Time for some advice

For borrowers with a lower deposit, the rates are less competitive - ranging from 2.99% to 3.89% on 80% loan-to-values - leading some to urge borrowers to look to alternative deals. "In the current market fixing for only two years makes little sense", claims mortgage expert Ray Boulger of broker John Charcol.

"Either the base rate stays low, in which case a tracker will be better value, or rates go up, in which case after two years a new fixed rate will only be available at a higher rate."

He recommends borrowers look to a best buy tracker or consider taking out a five-year fixed-rate deal. Among the best buys for longer-term fixes are the 4.59% fix from Newcastle Building Society and the 4.49% deal from the Co-Operative Bank, which is available for borrowers with a 25% deposit.

If you want to find the best mortgage for you, why not try our free mortgage service, which allows you to determine exactly which deals you qualify for in a matter of moments. Our in-house mortgage team are also on hand to provide help and independent advice at the click of a button if needed too.

More: Why length really does matter | Get a cheaper mortgage while you still can

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.