A new five-year fixed mortgage deal has launched, allowing customers to leave after just two years fee-free.
Most mortgage loans force you to either fix your costs for a set period of time – and charge a fee you if you want to leave before that time period is over – or are subject to fluctuating costs depending on the Bank of England interest rate.
The new offer from Virgin Money, however, gives borrowers a bit of both. The costs are fixed for five years but if rates fall, as is currently expected, homeowners can leave after two and go on to a cheaper deal with Virgin.
If they choose to leave before the two years or if they move to another provider in the five years, the early repayment charge is 1.5 per cent. Virgin Money claims the deal is a “game changer”.
Brokers have described the deal as “one for the records” and say it shows how lenders “are actively working in ways to attract new business.”
However, they have said that because the rate on the deal is quite high, some borrowers may err towards taking their chances on cheaper options that don’t offer the same flexibility.
The new fix and switch mortgage – for people purchasing homes – is charged at a rate of 5.14 per cent for those with a 15 per cent deposit and 5.27 per cent for those with a 10 per cent deposit.
But far cheaper rates are available, with a rate of 4.38 per cent on the market – also from Virgin Money – for those with 10 per cent deposits.
If rates were to drop further, these customers would be stuck paying the higher rates for the five years, or would face a hefty early repayment charge, which could be tens of thousands of pounds.
Some brokers have predicted that rates of 3.5 per cent or even lower could be available in 2026, and though these would not be available to those with small deposits, lower rates than are available are predicted.
But this outcome is not certain, and depends on the Bank of England cutting interest rates. Experts have warned that global political events could change this forecast, and so having a five-year deal that provides certainty could be a popular option amongst some borrowers.
So do brokers think the deal will be a game changer for the market?
Nick Mendes of John Charcol brokers said: “It’s an interesting proposition to have on the table when talking to client.
“For example, some want security but also want to have the option to review sooner in the event interest rates go down. This allows them to offset the risks without any penalties. Fixed rates are expected to reduce over the next few years, but nothing is certain especially when we consider the global uncertainty.
“Clients want stability but tend to opt for a 2-year fixed as nobody wants to be tied into a higher rate for longer than necessary,” he added.
“The other aspect is on maximum borrowing, this product will be assessed using the lenders 5-year fixed or longer calculator which means client can borrow more than on a 2-year fixed deal.”
Aaron Strutt of Trinity Financial, said some may be less keen on the option, and said: “It is a shame Virgin’s normal five-year fixes don’t come with two-year exits. They would be a game changer. I think I would take my chances and go with the normal rates that are nearly one percentage point cheaper.”