The new mortgage that lets you track AND fix

Robert Powell looks into the new five year mortgage that lets you get hold of a low tracker rate for two years before locking in at a fixed level for three...

I honestly have no idea how to start this article in an original way.

Such is the current importance of the fix or track mortgage dilemma that I feel I have exhausted all interesting openings for mortgage articles over the last two to three months.

Which is a shame, since amid all of the (not-so) new and innovative mortgage products trotted out by lenders over the last few months – the subject of this article is actually quite new as well as quite innovative.

I just wish I had an original intro to go with it.

Track and fix

Credit where credit’s due to mortgage lenders (pun fully intended) – over the last few months they have somewhat adapted their products to the current financial climate. Several new deals have burst onto the market offering buyers the chance to take advantage of low tracker rates before locking into a fixed deal. Yet the problem’s been that a lot of these products have either been not very good, not very original or a bit of both.

Yet a new product launched by Yorkshire Building Society breaks this trend somewhat.

The deal is named ‘track and fix’ and does exactly what it says on the tin. The mortgage as a whole is a five year fixed term product. However it is split into two parts. For the first two years, the mortgage rate tracks the Bank of England Base Rate plus 1.79%. That’s an initial rate of 2.29%.

This tracker period remains until 30.09.2013 – at which point the mortgage automatically morphs into a fixed rate deal pegged at 3.79% until 30.09.2016.

The product comes with a fee of £995 and is available to customers with a deposit of up to 40%.

So how do these rates stack up against the alternatives?

Rate game

Here are two of the best two-year variables around at the moment (bear in mind that the Yorkshire track and fix has an initial rate of 2.29%; that’s 1.79% + base rate):

As you can see, Skipton’s market leading two-year variable runs at around a third of a percentage point less than the track and fix mortgage. However this deal does come with a hefty £1,995 fee – double that of the Yorkshire deal.

The next best two-year variable that has a fee less than the Yorkshire’s £999 level is the Chelsea Building Society’s 1.79% + base rate deal – an identical rate to the track and fix. This Chelsea variable also has a lower fee level – just £195. But still, this comparison serves to show that the Yorkshire tracker rate is actually relatively competitive.

Onto the fixed part of the mortgage – remember, the Yorkshire deal is fixed at 3.79% for three years. Here's the market-leading three-year fixed deal:

So, the market leader in this category stands at just 0.9 percentage points less than the Yorkshire track and fix product.

However, the Yorkshire deal is fixed at 3.79% from September 2013 to 2016. The Nationwide deal is fixed from now until 2014.

If you add together the Chelsea and Nationwide mortgages, you get a ‘track and fix’ duo initially running at 1.79% + base rate before reverting to 2.89% fixed for three years, with a total fee of £694. That’s 0.9 percentage points cheaper in interest than the Yorkshire deal and £301 cheaper in fees.

Except that’s actually not the case at all.

Rising base rate

If you did plump for a straight two year tracker with a view to remortgaging to a three fixed deal after that, then chances are you wouldn’t get be able to get a rate anywhere near Nationwide’s 2.89% level.

Why?

Well, because firstly the fixed rate mortgage market is currently extremely competitive. And secondly, come September 2013, I think the Bank of England Base Rate will be higher than it is now.

So, what my mix and match mortgage above really shows (ignoring the fee difference) is how little the market has to move in the next two years to make the Yorkshire track and fix a market-leading deal. Indeed, if come September 2013 the best-buy three year fixed rate mortgage is just one percentage point pricier than it is now – the track and fix will have worked out cheaper.

A likely turn of events if you ask me, making this new Yorkshire mortgage a very competitive option.

But you do have to commit to the mortgage for five years, which may be too much commitment for some borrowers.

Same, same but different

In fairness, despite my trumpeting of this Yorkshire mortgage as new and original, it is very similar to other so-called ‘droplock mortgages’. These deals again offer you an initial tracker followed by a fixed deal, however it’s up to you when you switch out.

Barclay’s have a selection of such deals known as the ‘great escape’ mortgages, offering no early repayment charges or application fees if you switch between a tracker and fixed rate within the range. Here’s Barclays’s selection:

As you’ve probably noticed, a couple of drawbacks are immediately obvious with this range. Firstly, it’s only available to those remortgaging. And secondly, the fixed rates are only guaranteed until October 2013 – a full three years shorter than the Yorkshire deal.

Of course a further alternative would be to just pick up a cheap, low-fee, ERC-free lifetime tracker and switch out to a fixed deal before the base rate rises. However the main problem I have with this option is its potential to go wrong. If you switch out too late you could find yourself trying to ditch a pricey tracker in a newly inflated fixed mortgage market.

That risk is not so prevalent with the Yorkshire track and fix.

Yes, the base rate could be upped substantially over the next two years. But even if it increased by 2.5 percentage points before September 2013, you’ll still only pay 3.79% - the same as the fixed element. Indeed, a good mindset to have if you did go for this Yorkshire deal would be to budget as if you were on a five year fix at 3.79%* and then overpay (up to 10% per year is free) when the tracker element is low.

However there are few downsides to this product:

Downsides

It’s not the cheapest: Obviously you’ll pay a premium for this product and it would be cheaper to go for a standard lifetime tracker and then fix. But as I mentioned above, this could go horribly wrong.

Not as flexible: If the base rate starts to move after three months of the mortgage, you’ll still be forced to stick with the tracker for the remaining 21 months.

Large deposit: You’ll need to stump a 40% deposit.

Fee: £995 may not be the largest fee level, but it’s still pretty hefty.

What do you think?

Is this a good deal?

Have your say in the comment box below.

*A very reasonable rate when you consider that the market leading five year fix at 60% LTV is currently 3.49%.

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