To Fix or Not to Fix

by Mark Johnston

Everyday new reports come out either predicting a rate change or confirming that the base rate with stay the same for some time. This is causing many homeowners anguish as they struggle to decide whether to fix their mortgages or not.

This is something that the industry is well aware of but few are willing to do anything about, except one, Barclays.

Barclays, the owner of the Woolwich brand is offering a new type of mortgage facility called “drop-lock”. This allows homeowners to take advantage of a tracker or offset mortgage whilst having the ability to move onto a fixed mortgage without having to pay any early redemption penalties.

Barclays announced that this new feature would be available on its Woolwich mortgages the same day as it cut its rates to try and pull in more of the UK mortgage market. Its 80% loan to value range of mortgages have all been reduced by 0.21 percentage points whilst they have made further reductions on their two year fixed rate deals which have gone from 4.59% to 4.38%

The new drop lock facility will allow homeowners who take up a new tracker or offset mortgage to switch to a fixed rate mortgage in the future without having to pay any fees. This will be well received by those who can’t decide what to do and are looking for more flexibility in their mortgage.

Mark Posniak from the specialist property lender Drawbridge said: “Drop-lock mortgages are a superb option for borrowers keen to take advantage of low variable rates, safe in the knowledge there is no penalty should they wish to switch to a fixed rate,”

A report published last week predicted that interest rates may stay around the 0.5% until 2014 which is causing many borrowers to question when is the right time to fix their mortgage. A drop lock mortgage could be the answer they are looking for as they can opt for a tracker rate which is cheap at the moment and then switch to a more secure fixed rate if the Bank of England base rate starts to increase over time.

Mr Posniak went on the say: “The general consensus among industry experts is that interest rates will remain low for some time yet, but when they do start to rise – which they inevitably will – the drop-lock mortgage will ensure that homeowners can move easily and quickly to a fixed rate deal,”

This new facility may be replicated by other lenders in a bid to provide lenders with more flexibility in their mortgages. Back in 2008 the Halifax offered ‘Red Guard’ which allowed its borrowers to switch from a tracker to a fixed rate product in the same way.

Although this is a new facility from Barclays a drop lock mortgage isn’t anything new. Lloyds and Natwest have offered these facilities in the past but the UK mortgage market has changed since the financial crisis and borrowers are looking for much more innovative and flexible products both in terms of rates, the types of mortgage and repayments.

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