How to avoid higher home repayments

With inflation figures showing further price increases, homewowners who are worried that interest rates will rise this year are now being offered mortgage deals that can protect them against higher repayments. Brokers are recommending a range of options:

Split loan deals

From Monday, HSBC will offer borrowers the option of a split loan mortgage that allows customers to fix either 25, 50 or 75 per cent of their loan, with the remaining percentage on a lifetime tracker rate. The fixed rate depends on the proportion of the mortgage that is fixed and the loan-to-value of the deal. Rates start from as low as 2.49 per cent for the 25 per cent fixed option at 70 per cent loan-to-value. The product has a £999 fee and is available to customers borrowing up to £500,000.

“The rates on offer look very good,” said David Hollingworth of London & Country Mortgage Brokers.

Mortgage brokers point out that many other lenders will allow borrowers to mix and match products and specify the split between fix and tracker. “However, you do need to watch out for the fees charged and check whether a fee is payable on each element of the loan,” said Hollingworth.

Switch and fix deals

Otherwise known as a “drop-lock” mortgage, these products allow borrowers to take out a tracker rate but then move on to a fixed-rate deal – with the same lender – without any early repayment charges.

Nationwide Building Society and Royal Bank of Scotland (RBS) are among the few mortgage providers that currently offer the switch-and-fix option. However, Nationwide charges a reservation fee for the new fixed rate while RBS allows customers to switch free of charge provided they have been on the tracker for at least three months.

Nationwide has a two-year tracker at 2.68 per cent – bank rate plus 2.18 per cent – available up to 70 per cent loan-to-value. RBS has a two-year tracker at 2.59 per cent – bank rate plus 2.09 per cent – at up to 60 per cent loan-to-value.

The potential downside is that the lender’s fixed rates are likely to have risen by the time the borrower decides to switch.

Capped rate mortgages

A capped rate mortgage is another option that limits a borrower’s exposure to rising rates. Capped rates cannot climb above a pre-set rate, known as a cap.

Brokers recommend a capped rate for about five years. Britannia/Co-op has a five-year deal at 2.99 per cent – bank base rate plus 2.49 per cent – with a cap of 5.99 per cent available up to 75 per cent loan-to-value. It comes with a £999 fee.

“The best five-year tracker rate at 75 per cent loan-to-value is 2.84 per cent from ING so a borrower will not pay much of a premium – just 0.15 per cent – to have the security of the cap,” said Nigel Bedford of Largemortgageloans.com.

Interest rate insurance policy

RateGuard is an insurance policy offered by insurer MarketGuard that pays out a monthly sum if rates rise above a certain amount.

Premiums are set according to the size of the mortgage and the rate insured. For example, protecting a £500,000 repayment tracker mortgage against a rate rise of more than 1 per cent costs £193 per month with a two-year policy. This drops to £55 per month if the policyholder wants to protect the same mortgage against a rise of more than 3 per cent.

Brokers warn this option is likely to be the most expensive