Is this the right time to be fixing your mortgage?

First Direct is the latest lender to cut its mortgage rates. Its two-year fix will be slashed from 5.98% to 4.99% at 3pm on Friday, September 12, making it one of the lowest rates on the market.

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But with an increasing number of economists forecasting interest rate cuts either before the end of this year or early next, is this a good time to be fixing your mortgage payments?

Some people will always go for a fixed product, regardless of the rate, because of the security it offers, while others are prepared to take more of a gamble and opt for a variable rate deal in the hope that interest rates come down. However, there is a halfway house – the drop lock - which is offered by a number of lenders.

What is a drop lock?
Some lenders will allow borrowers to take a variable rate mortgage with the option of moving on to a fixed rate without incurring a penalty or having to pay an arrangement fee for the new product.

Halifax has just started offering this facility. It is called Rate Guard and borrowers can opt for any of Halifax’s tracker mortgages and switch over to one of the bank’s fixed rate products within the first 12 months.

Jaedon Green at Halifax said: "Borrowers can be forgiven for not knowing whether to fix or track in the current market. Rate Guard delivers the best of both worlds, allowing customers to select a tracker with confidence, knowing that they can switch to a fixed product should rates become cheaper, or if their personal circumstances change."

Of the major lenders Lloyds TSB, Nationwide and Natwest, also offer drop-lock facilities, but a number of smaller building societies do so too. While the option is available across all of Halifax’s standard tracker mortgages and fixed rate products, some lenders restrict it to certain deals. You should therefore check this before signing up as it may prove pretty worthless if you can only move over to one fixed deal, the rate on which is not very competitive.

But is going for a drop lock now, really the best option?
You need to bear in mind that although the next move in interest rates now looks as though it will be downwards, there is no guarantee of this. Only a few months ago many economists were predicting interest rate increases because of rising inflation. If you opt for a drop lock now in the hope that fixed rates will get cheaper and the tide turns again, you may find that the cost of fixing rises again. Drop locks are therefore not completely without risk and because they’re not available from all lenders, you may find it costs more to get that flexibility.

For example, Nationwide Building Society has one of the leading two year trackers at 5.58%. The fee is £1,499 and it is available for loans up to 60% of a property’s value. However, Principality Building Society is offering a tracker with a lower rate, 5.49%, and a lower fee, £999, and HSBC has a two year discount at 5.39%, also with a £999 fee, so you need to ask yourself if you will actually use the drop lock option available from Nationwide. If interest rates do fall you may decide not to bother in which case the HSBC or Principality deals would work out cheaper.

Also, because fixed rates have fallen so much in recent weeks, you may think now is a good time to lock your mortgage payments as the best rates are currently slightly lower than the leading tracker and discount deals.

Yorkshire Building Society has a two-year fix at 5.29%, with a £995 fee. It is available for loans up to 75% of a property’s vale up to a maximum loan size of £300,000. And First Direct’s new two-year fix, which is available for loans up to 80%, has an even lower rate at 4.99% but the fee is higher at £1,499 so whether it works out better value than the Yorkshire deal will depend on your mortgage size.

There are a couple of two-year fixed mortgages with even lower rates - Halifax and Yorkshire are offering rates at 4.89%. However, you need to be wary as they both charge a huge arrangement fee of 2.5% and they only work out best value for those with mortgages of £50,000 or less. But the minimum loan size on the Yorkshire product is £75,000 so that will never be the cheapest option and the Halifax deal is only available for loans between £50,000 and £500,000 so again very few people will benefit by taking it.

What if you only have a small deposit?
Life remains tough for those with deposits of less than 25% as most lenders are still restricting their cheapest deals to those with significant equity in their home. However, if you need to borrow more than 75%, HSBC has some competitive deals available to 90%. Its two-year discount at 5.39% is available for loans up to this level. It also has an alternative product: the rate is higher at 5.69%, but the arrangement fee is considerably lower at £249 (compared with £999 for the 5.39% deal).

If you want to fix, Yorkshire Building Society has the lowest rate for loans up to 90% at 5.89%. The fee on this deal is £495.
Choosing a mortgage can be really difficult because there are so many options. If you are unsure about what product to go for, an independent mortgage broker will be able to help.

Have your say: Are you looking for a mortgage but don’t know what to go for? Visit our forum as other members may be able to help.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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