The most flexible mortgage in the UK!

This mortgage gives you the best of both the fixed and variable rate worlds.

Do you want to take advantage of current low interest rates by having a variable mortgage but be free to move swiftly to a fixed rate if rates start to rise? If so, a “drop-lock” mortgage could be the answer.

Also known as “switch and fix” mortgages, drop-lock loans allow borrowers to enjoy low variable rates but protect themselves from a big rise in the event that rates go up.

Yorkshire Building Society is the latest lender to enter the drop-lock arena. It is offering two and three-year tracker options with initial pay rates of 2.49% and 2.79% respectively. If they opt to jump to a fix during their chosen term, borrowers will not be charged an ERC or an arrangement fee for a new mortgage. Let's take a closer look at these deals

Other lenders

Yorkshire isn’t the only lender to offer a drop-lock option.

Woolwich, the mortgage arm of Barclays, allows all customers on tracker mortgages to switch to a fixed rate mortgage without an early repayment charge.  The lender refers to the option as “Switch & Fix”. It introduced Switch & Fix for new customers in July 2010 but in October 2010 extended the option to all tracker mortgages.

Other lenders offering drop-lock mortgages or switch and fix include HSBC, Royal Bank of Scotland, Santander, Northern Rock, Skipton Building Society and Nationwide.

Why a drop-lock is a good idea

Essentially, a drop-lock feature on a mortgage enables borrowers a chance to escape from rising rates if (or when) the base rate starts to rise.

So it can be a good idea if you want to take advantage of low interest rates but want to be able to switch simply and quickly to a different product later on. To put it simply, you can hedge your bets with this kind of mortgage.

Downsides of drop-lock

Drop-lock mortgages mean sticking with the same lender when it comes to choosing a fixed rate and this might not be the best option for you.

In other words, you can switch away from a tracker but you won’t necessarily have the pick of the best fixed rates on the market, just a very limited range.

So you could end up with the lender having you over a barrel: either you continue with a tracker when rates are rising or you move to a deal with a higher-than-average interest rate, albeit fixed.

Also some lenders will still charge a product or arrangement fee for the new mortgage. So while you won’t be charged a hefty early repayment charge, you won’t be able to swap deals without paying anything at all.

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Another side of drop-lock is that while you – or experts – might call the bottom of the interest rate cycle and expect the only way rates will move is upwards, you might be wrong. So, in theory, you could jump ship from an attractive tracker rate to a fixed rate and then find interest rates remain low, so you would have been better off staying put.

Other options

Another option is to take out a tracker with no early repayment charge, usually lifetime trackers - variable rates that track a set percentage above the bank base rate for the entire life of the mortgage, rather than just a couple of years. You could then move onto a fix from any lender without penalty, enabling you to shop around for the best deal at the time.

For example, ING Direct offers a lifetime tracker at 1.85% above the base rate to 60% loan-to-value with a £945 fee and no early repayment charge at any time. So, assuming you had enough deposit or equity, you could take out this mortgage and still have the option of moving to a fixed rate – with any lender – at a later date.

Here are some of the best lifetime trackers around at the moment:

Finally, some lenders allow borrowers to have part of their mortgage on a fixed rate and part on a tracker rate. So you could go 50:50 and have half your home loan on a secure fixed rate and half on a tracker at the mercy of future base rate rises.

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