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by: David Hollingworth, Ray Boulger, Kit Thompson
  • 04/05/2010
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HSBC has launched a split loan mortgage to help customers facing the dilemma of whether to choose the security of a fixed rate deal or the flexibility of a tracker. Will this push intermediary lenders into offering similar innovative deals? Are they currently doing enough?

Name: David Hollingworth
Company: L&C Mortgages
There is currently a great deal of uncertainty, and the imminent General Election does nothing to dispell that. Borrowers are unsure of the best course of action. Should they hold on, grab a fix now or take their chances with a tracker rate?

The HSBC deal offers a package for those borrowers who want the best of all worlds. The rates on offer are certainly very attractive and so will carry some appeal even if the tracker rate can only go up.

HSBC has shown again that it is good at recognising marketing opportunities. Of course, lots of lenders are able to mix and match their products and brokers have been creating bespoke offerings for their clients for years.

There are other solutions available to borrowers plagued by uncertainty. A number of lenders have launched capped and tracker rates. ITL Mortgages, Coventry and Britannia are all offering the opportunity for customers to peg their mortgage to Base Rate without being completely exposed to rising rates.

There are also ‘switch to fixed’ options, sometimes known as drop-lock mortgages, that offer a safety valve for those unsure whether a tracker poses dangers.

Lenders have therefore shown that they are willing to innovate where they can and recognise a niche deal that is right for the time. As welcome as these products are, we should not hold our breath for a wave of new innovation. In fact, most brokers would probably be happy just to see more basic but competitive product launches, especially at higher LTV ratios.

Name: Ray Boulger
Company: John Charcol
The innovation in HSBC’s new split loan mortgage is not the ability to mix and match a fixed and tracker rate, as several lenders offer this facility. In fact, because HSBC insists on the fixed and tracker parts of the mortgage being a multiple of 25%, it offers less flexibility in this respect than other lenders that offer this option.

What is different about the HSBC offer is that the initial interest rate on the tracker element is identical to the fixed rate, but the actual rate varies, not only based on the LTV but also on the split required between the fixed and tracker portions.

For example, for LTVs up to 70%, the rate is 2.49% if you have only 25% fixed, but 2.99% if you decide you want to fix 75% of your borrowing.

However, a key point is that in the current market fixing for only two years makes little sense. Either Bank Rate stays low, in which case a tracker will be better value or rates go up, in which case after two years new fixed rates will only be available at a higher rate.

Two benefits of this mortgage are that the tracker element is ERC free and offers are valid for six months. However, it is worth remembering that HSBC’s underwriting requirements for interest-only mortgages are very onerous.

So, as with many other mortgages there are pluses and minuses. HSBC says that this mortgage lets borrowers ‘have the best of both worlds’. An alternative way of looking at it is that it guarantees you will have chosen the wrong rate for part of the mortgage.

Name: Kit Thompson
Company: Amber Mortgage Solutions
The logic behind the split mortgage product is sound, offering clients the opportunity to take advantage of the current historically low Bank Base Rate, whilst balancing this with a fixed rate and not having to worry about Base Rate increasing. The split between fixed and tracker is determined by the client’s circumstances and overall attitude to risk.

However, with the tracker rate being offered at the fixed rate level, then there really is no point to this product at all, as with interest rates only set to go one way, the client would be better off fixing all of their loan.

The product would only work if the tracker margin was significantly low enough to offer the client a genuine interest saving, when compared to the higher priced fixed rates. As it is, there are significantly cheaper tracker options.

I genuinely hope that more of the lenders that make their products available via mortgage intermediaries do follow suit – not necessarily with a similar product, but by thinking ‘outside of the box’ to come up with new ways to encourage more people to move home. We desperately need more product innovation in the mortgage market, particularly for intermediaries.

Of course, this will continue to be largely governed by lenders’ overall ability and desire to lend at rates and LTV ratios that are more attractive to buyers – especially the first-time-buyer market at the bottom of the property chain. Hopefully things are beginning to slowly improve and we will see more competitive products filter through.

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