The variable mortgage deal that beats base rate rises!

With the Base Rate likely to rise soon, going for a tracker mortgage is a gamble. That is, unless you go for this one!

I've written before about how I have always been a big advocate of fixed rate mortgages. The idea of taking a bit of a gamble with Bank Base Rate has never appealed to me.

And while I have had my head turned once or twice over the past six months by eye-poppingly cheap looking tracker deals, I still maintain that, all things being equal, I would still go for a fixed deal if I were buying at the moment.

However, yet another tracker mortgage has caught my eye, one with a difference. In fact, it seems to completely eradicate the risk element of going with a variable mortgage!

Enter Yorkshire Building Society...

This new deal from Yorkshire Building Society, launched last week, is extremely clever in its structure. It is a stepped tracker, which means that the rate above Bank Base Rate that you pay changes each year. Unusually, however, with this deal, the rate reduces with each passing year.

So in the first year, you will pay a rate of Bank Base Rate plus 3.49%, which drops to Bank Base Rate plus 2.49% in year two, and finally Bank Base Rate plus 1.49% in the third year.

I love this as a concept. Bank Base Rate is at a historic low, and is only likely to go upwards. That's why a tracker always looks a bit of a gamble - sure your repayments will be nice and low now, but what happens if they jump suddenly?

With this product, you are covered against those increases!

It's not just the rate that's good...

It's one thing to offer a competitive rate, but all too often such deals are restricted to those with huge deposits, or come attached with massive product fees.

However, this deal is available at 75% loan-to-value - pretty good in the current climate - and with a product fee of just £495.

How do fixed rates compare?

Let's take a look at the best three-year fixed deals to see how the rates compare.

The eye-catching cheapest deal is also a stepped mortgage, this time from Lloyds, but it's frankly rubbish. The mortgage is an extremely low 2.59% until April 2010, but after that you are stuck on a 5.59% fixed deal until January 2013! Not a 'must have' deal by any stretch of the imagination.

The next best deal for those with a 25% deposit is from NatWest and Royal Bank of Scotland, at 4.39%. This looks a pretty good deal to me, though it's product fee is double that of the Yorkshire Building Society tracker at £999.

Alliance & Leicester also offer a product at 4.39%, but this one will likely set you back even more - the product fee is a whopping 2% of your advance! So, on a £200,000 mortgage, that's a fee of £4,000! Ouch!

Tracker versus fixed rate

Of course, there is still some uncertainty with the tracker deal. If Bank Base Rate accelerates quickly and in large incrementals (which cannot be ruled out), then you could still end up getting whacked. But how much would it need to jump?

Let's say you want a £150,000 mortgage, on a 25 year term. If you sign up to that market-leading Royal Bank of Scotland 4.39% three-year fixed rate deal, your monthly repayments on a normal repayment mortgage would be £824.

Now, if you sign up for the Yorkshire deal instead, you have lower repayments to start with - just £790. Bank Base Rate would have to increase by 0.4% within your first year on the product for your repayments to move level with the Royal Bank of Scotland deal.

And remember, the rate you pay falls by another 1% after that first year! So the Bank Base Rate will need to rise above 2% during your second year before your repayments match the Royal Bank of Scotland deal, and then pass 3% in year three.

The only way the Yorkshire deal comes unstuck is if Bank Base Rate increases at a faster rate - so more than 1% a year. Even then, you at least have some protection against those rises; certainly more than you do with other variable deals.

Would I sign up for it?

This is just the latest in a very tempting line of variable mortgages. HSBC started it with its clever discount mortgage which currently has an interest rate of just 2.99%, a product you can find out more about in this video.

It was followed by the even cheaper Woolwich Base Rate tracker mortgage, a product which is the cheapest I've ever seen! Again, you can get the full scoop on it in this video.

And while I saw the appeal of both deals, the deal from Yorkshire Building Society is now my favourite tracker deal. Firstly, it is available to far more people, as you only need a 25% deposit to get your hands on it, as opposed to a 40% equity stake.

And secondly, I really like the protection it affords. Personally, I expect Bank Base Rate to move upwards gradually - the Monetary Policy Committee has shown itself to be a conservative, cautious group at the best of times, and I just can't see them signing off big increases in Base Rate.

Yes, it's still a gamble going for a variable deal, and that uncertainty is why, overall, I would still opt for a fixed deal over a tracker, but this product is going to look very attractive to a lot of you, and with good reason. Let's hope more lenders follow their lead!

Get the perfect mortgage

If you are on the hunt for the perfect mortgage, or just want to be mortgage-free, there's a host of ways lovemoney.com can help.

Firstly, why not follow the tips (and share some of your own) in this goal: Cut the cost of your mortgage and pay it off early

Next, why not check out this video: How to...slash the cost of your mortgage payments

And finally, if you have any mortgage related questions why not head over to our Q&A section and pick the brains of your fellow lovemoney.com readers!

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