Borrowers charged more for “switch-to-fix” flexibility

Homeowners who opt for “switch-to-fix” mortgage deals – which allow borrowers to take out a tracker mortgage and then move on to a fixed-rate deal with the same lender without penalty – are losing out on some of the most competitive rates.

Switch-to-fix mortgages, also known as “droplock” loans, have become popular with borrowers who want to take advantage of the current low interest rates but retain the option to switch to a fixed rate without incurring any early repayment charges (ERCs) as and when interest rates start to rise.

These types of deals are already offered by Woolwich, Royal Bank of Scotland (RBS), Nationwide Building Society and Santander. Northern Rock is expected to launch a switch-to-fix range next week.

However, an analysis by FT Money of the current switch-to-fix deals on offer shows that borrowers are paying a premium for this flexibility – on both the tracker and fixed-rate options. The cheapest two-year tracker on offer from Nationwide Building Society is 2.79 per cent – 80 basis points more expensive than the current best deal of a 1.99 per cent two-year tracker from First Direct.

RBS’s cheapest tracker option is also more expensive at 2.69 per cent. However, Woolwich and Santander have slightly more competitive rates at 2.39 per cent and 2.19 per cent respectively.

The story is the same with the fixed-rate options offered as part of the switch-to-fix deals. A switch-to-fix customer with RBS would currently have to pay 70 basis points more to fix their loan for two years, compared with the best rate of 2.79 per cent from Santander.

Nationwide is equally uncompetitive with a two-year fix of 3.44 per cent – and this is only available to homeowners with equity of 50 per cent or more.

Switch-to-fix customers with Woolwich have access to a two-year fix of 3.28 per cent, or a cheaper one of 3.18 per cent from the bank’s “loyalty” mortgage range if they are existing current accountholders.

David Hollingworth of London & Country, the mortgage broker, said that while the flexible nature of switch-to-fix loans is attractive, borrowers are likely to find they have to make some compromises on the tracker rate as well as limiting their options when it comes to fixing their loans.

“It’s good that lenders offer these type of deals but borrowers should be aware they are unlikely to get the best rate on their mortgage,” warned Hollingworth.

The other downside of these deals is that the lender’s fixed rates are likely to have risen by the time the borrower decides to switch to a fixed deal.

“Borrowers should therefore consider whether what they really need is a fix, because they welcome that security, and simply choose the best fix they can find now, rather than hoping the lender will offer a competitive fix once they do decide to switch,” said Melanie Bien of Private Finance.

Homeowners who are keen to take advantage of cheap tracker deals also have the option to take out a tracker with no ERCs now and later switch to the
most competitive fixed rate from any lender. ING Direct currently has a market-leading lifetime tracker at 2.35 per cent, available
up to 60 per cent loan-to-value.

An alternative option for those who want to hedge their bets is to split their loan – with half on a tracker rate and the other half on a fixed rate.

“This will give you some protection from rate rises while still enabling you to take advantage of cheap tracker rates while interest rates are low,” said Bien.