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First Time Buyers

With a minefield of information, which mortgage deal will work best for you in the long term? Interest rates have been flat for a long time now, and it is almost impossible to predict when they will rise again, let alone how far they will go. The question is, do I go for a variable or a fixed rate deal. It may make sense now to have a product tied into low rates but this could prove to be more expensive in the long term as they increase at which point you might regret not putting a fix in place. But, on the other hand, fixing now may not make any sense if rates are slow to rise.

If you really can’t decide on your best option, then you could look at a product that allows you to tap into the rate advantages of the present but that also protects you in the future. The drop lock mortgage (also sometimes referred to as a hybrid loan) basically takes away some of your risk. You start off with a low rate variable option, such as a tracker, but you are given the chance in the future to switch to a fixed rate if market conditions make this less cost-effective. Generally, this also means that you won’t be charged early repayment charges for making the switch as it has already been written into your agreement as an option. This will be cheaper and quicker to arrange than switching to a completely new loan.

So, this kind of option may look like a great deal from your perspective but the fact that there aren’t a lot of products like this on the market right now tells you that it might not work to lender advantage. From a profit-making point of view, I’m sure many banks and building societies would prefer you to pay more as rates increase or by opting for an early fix. So, you’ll have to dig around to find drop lock deals as not every lender runs them.

You also need to check out the terms and conditions of the deal before you take one out. Most will have a clause in there that will only allow you to switch fee-free if you meet their conditions at that time. Some will give you a full fixed rate product line to choose from if you do decide to lock; others may not. You may also find that you don’t get the best available market rates here and that you’ll need a hefty deposit/low LTV ratio to qualify. So, this may be a good option for some but not so good for others – it’s worth a look if you can’t make your mind up on which product to choose but you should also take a look at other options at the same time.