A new mortgage good for all weathers
By Chris Gilchrist 27th
February 2008
We haven’t seen much innovation in the mortgage market of late, so two cheers for
Cheltenham and Gloucester’s new All Weather Mortgage, which combines the benefits
of tracker and fixed rate loans.
C&G is the mortgage arm of Lloyds TSB, which like the other high street banks wants
to win back some of the share of the mortgage market it lost to more aggressive
lenders in the 2004-06 boom.
Its new All Weather Mortgage is a base rate
tracker mortgage with a term of two or five years which gives
you the option to switch to a fixed rate mortgage at any time. C&G say they will
always have a fee-free
fixed-rate deal on offer, and while this may not be the best
rate on the market, avoiding fees is now a priority for many borrowers.
Longer-term mortgages avoid 'churn'
Over the past five years, mortgage brokers have encouraged more and more borrowers
to go for short-term deals so that they can earn another commission when the initial
deal ends and the borrower faces an uplift to the lender’s Standard Variable Rate.
But then lenders struck back by demanding much higher arrangement fees, which on
the best-rate deals are now often over £2,000. Paying such high fees makes no sense
for people with mortgages of under £100,000. So avoiding the need to
re-mortgage regularly by choosing decent longer-term deals
is now a sensible strategy for most borrowers.
Will C&G's All-Weather Mortgage provide the answer? Well, in terms of the tracker
element, it does. The rate is base rate plus 0.59%, giving a payable rate of 5.84%
now, which is more than the best-priced deals in the market, but the arrangement
fee is a mere £99 compared with £500 or more on deals with slightly lower interest
rates. There are redemption penalties (3%, 2%, 2%, 1%, 1% for the five-year term),
but they don’t apply on a switch to a C&G fixed rate.
A lot depends on the fixed rate offered
How competitive will those fixed rates be, though? C&G hasn’t often featured in
the
fixed rate mortgage best buy tables in recent years. Its current fee-free
fixes are at about 6.15% for periods between three and seven years.
Right now you could get a five-year fix at 5.6% elsewhere, but only if you paid
an arrangement fee of £500 or more. So it looks as if the fixed rates will be reasonably
but not keenly priced - hence only two cheers rather than three for the product.
C&G’s own research showed that as many as 44% of the people it surveyed believe
that interest rates will be higher in 12 months’ time. This squares with other research
I’ve seen that says that people can see inflation rising and expect that this will
lead to higher interest rates.
The Bank of England says it will boost growth
They haven’t been listening to Bank of England Governor Mervyn King, who in recent
speeches has signaled that he will let inflation rise temporarily above the 2% official
target on the basis that rising energy and food prices will level out.
Anyway, with the All Weather Mortgage, if by the autumn or next spring it does look
as if inflation is roaring away out of control and interest rates will have to rise,
then borrowers will be able to make a switch to a fixed rate before they have to
suffer the pain of rising mortgage repayments.
In fact the All Weather Mortgage delivers half of what US mortgage borrowers enjoy
- the ability to switch between fixed and variable rates at low cost. With C&G,
you can make a low-cost switch from a variable to a
fixed rate, but not the other way.
Still, given that you’re unlikely to want to fix for a term of over five years,
this is a good product innovation which is well worth considering and that I’m sure
other lenders will copy before long.
Article produced by EveryInvestor.co.uk
