The clever fixed and tracker mortgages that break the mould

Whether you're after a fixed or tracker mortgage, these innovative homeloans may be the answer.

Mortgage lenders certainly have a hard job at the moment. On the one hand they have been told to lend responsibly, improve their balance sheets and, whatever they do, avoid a repeat of the credit crunch.

But they are also being pulled in the opposite direction – urged to lend more to those who want to get onto the housing ladder, including high-risk borrowers with small deposits, to help boost growth and get the housing market moving.

It’s pretty difficult to achieve both, especially when they are not exactly awash with cheap funds to lend out.

Hopefully the Government’s Funding for Lending Scheme, which will make £80 billion available to lenders, can ease some of the funding problems, and possibly lead to cheaper rates for borrowers. But there are no guarantees.

In the midst of all this, is it possible for lenders to find time to innovate when it comes to product design? Does the desire to come up with exciting new products fall by the wayside when times are tough, or is the opposite true? Is creativity actually ignited by the need to come up with ever more ingenious ways of enabling borrowers onto the ladder in a way that minimises the lending risk?

Innovation for first-timers

In fact, the credit crunch has spawned a good deal of new and innovative product types, mainly borne out of the fact that first-time buyers – the engine of the housing market – simply can’t buy in any great number while mortgages for those with a small deposit remain limited and expensive.

Instead, we have seen a raft of products launched that allow either parents, friends, the Government or even homebuilders to help buyers get that first foothold onto the ladder.

Guarantor mortgages are one way that lenders have tried to help first-time buyers without taking on more risk themselves. There are a couple of variants.

With the Lloyds TSB Lend a Hand mortgage, the parents put down some savings as security against the loan, the buyer puts down a small deposit and the lender provides the remainder. The deal enables the buyer to borrow 95% of the property’s value at a decent rate of interest, and the lender lowers its own risk with the parent’s savings.

There is also a Local Authority-backed version of Lend a Hand where the council indemnifies 20% of the property’s value rather than a parent’s guarantee – a scheme which a dozen or so local authorities have already signed up to.

The other guarantor method is that a parent simply signs up to a mortgage, and uses their own property as security or agrees to cover the payments from their income if their child defaults.

Guarantor mortgages are offered by a range of lenders, including one deal from Aldermore Mortgages where buyers can access up to 100% of the property’s value.

The borrower gets on the ladder without a deposit and the lender’s risk is reduced by the parental guarantee, which can be for a maximum of 25% of the property’s value, using their own property as collateral. However, the borrower’s monthly repayment must still be affordable on their own income, and the rate is a not-too-cheap 5.98% for a two-year fix. But what do you expect for a 100% mortgage?

Added to lender innovations are the Government’s HomeBuy Schemes, which include FirstBuy and NewBuy, and enable those without a substantial deposit to get onto the housing ladder.

Just how successful these schemes have been though is open to debate. Find out more in Why the NewBuy scheme isn't working.

‘Best of both worlds’ products

A new breed of products has been launched to account for borrowers’ indecision about what sort of rate to go for. Many borrowers are unwilling to pay a premium for a fixed rate now, but they are aware that rates are only heading in one direction – upwards.

Some lenders offer a droplock facility (also called Switch and Fix) on their mortgage range. So if you take out a tracker rate you are free to remortgage to any of that lender’s fixed rate products at any point, without paying early repayment charges (although a new arrangement fee may apply).

This means you can benefit from low monthly repayments now with the option of fleeing to a fixed rate should rates begin to rise above your comfort zone. Of course, there is no guarantee as to what fixed rates your lender will have available in the future, but it does give you some flexibility.

Hybrid mortgages are a more structured version of droplocks. The deal starts out as a tracker rate for a set period before automatically moving to a fixed rate after a set number of years. The bonus over a droplock is you know now what the future fixed rate will be, but with a droplock you have the option of staying on your tracker if rates stay low.

Accord Mortgages offers a five-year hybrid that starts as a two-year tracker at base rate plus 2.75% (so currently a rate of 3.25%). In two years it automatically changes to a three-year fixed rate priced at 4.19%.

Long-term options

Lenders have recently come up with some cracking long-term fixed rates for those who choose security over immediate savings.

Last week’s launch of Skipton’s seven- and ten-year fixed rates, starting at 3.99% and 4.49%, showed just how competitive this market has become, as explained in my piece Why fixed rates are always in fashion. And this week HSBC has blown everyone out of the water with its simply stonking five-year fix at 2.99%.

One clever idea from Chelsea Building Society is the ‘choose your fixed term’ mortgage. The rates and fees are set according to your deposit amount and borrowers can choose whether to fix for five, six or seven years – whatever best suits your needs.

The specialists

It’s not just the mainstream market that is innovative; indeed the specialist lending arena has long been considered a hotbed of product creativity. After all, the mortgages are designed to fit particular niches that the high street lenders may not cater for.

In the last few weeks we have seen buy-to-let mortgages launched for those with just 15% upfront, as well as deals for landlords with a history of ‘minor’ credit problems. The short-term lending market is also booming with bridging providers coming up with new products on a weekly basis.

If you know of any more unusual or innovative mortgage deals, in any sector of the market, please share them with us by posting below.

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online

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 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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Barclays to consider parents' income on mortgage applications

Million borrowers face jump in mortgage repayments