Sam Dunn: Should I take out a 'switch and fix' deal?

House Doctor
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The Independent Online

Question: Trying to second-guess interest-rate movements can be a mug's game, but do you think it's worth taking out what my lender, Nationwide, calls a "switch and fix" home loan? It seems to offer me some sort of insurance against rate rises on a tracker. Should I go for it? Nina Clarke, Cambridge



Answer: "Switch 'n' fix" is the fancy new name for what used to be known as a "drop-lock" mortgage.

It allows you to take out a tracker loan on your home but then – if you wish – quickly jump to a fixed-rate deal with the same lender without incurring any early repayment charges.

The appeal is clear: it grants you an exit from a dangerously rising variable tracker if base rate starts to soar.

Many economists predict the Bank of England base rate is unlikely to stay at its historic low of 0.5 per cent for all of 2010, especially with early signs of inflation.

It's a very useful type of home loan to take, says David Hollingworth of broker London & Country.

"If there's a panicked situation, and rates rise sharply, it offers a get-out clause by letting you move to the security of a fix."

Nor is there a premium to pay for such flexibility, adds Andrew Montlake of broker Coreco, though he says that Nationwide Building Society will charge you an arrangement fee for your new fix.

"Depending on which fix you take, this will either cost you nothing, set you back £495, or £995."

The last, most expensive fee is for its most competitive "switch 'n' fix" tracker – a two-year deal at 2.14 percentage points above base rate.

Nationwide is one of very few lenders to offer such deals, along with Royal Bank of Scotland (RBS).

RBS's two-year tracker is currently at 2.49 percentage points above base rate with a £999 fee.

However, you won't be able to switch free of charge unless you've been on RBS's tracker rate for at least three months. So what are these loans' downsides?

The itch to switch may be strong if base rate begins to rise, adds David Hollingworth, "but it's also likely that your lender's fixed rates will also newly reflect the changed interest-rate atmosphere, with more pricey deals."

To this end, it'll be worth considering alternatives to a "switch 'n' fix".

Ask your mortgage broker about either taking out a part-variable, part-fixed home loan – making sure each part of the deal lasts as long as the other to avoid an expensive overhang – or a so-called "capped tracker".

These latter deals track a base rate but rise only so far, effectively limiting your liability if rates rocket.

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