Mortgage payers told to beware 'dangerous' lock-in deals

Loans are on offer from around 1.25 per cent but borrowers could be locked into payments that more than quadruple when the fix ends.

With house prices at historic highs it can be tempting to opt for a low initial rate to afford the home of your dreams. Yet after the fixed period, you will be tied into paying the lender's standard variable rate (SVR) for up to four years or face hefty redemption penalties.

'These lock-in deals can be dangerous,' says Ray Boulge, of mortgage broker Charcol. 'When you revert to the lender's standard variable rate after the fixed period you have no control over the rate you pay.'

Lenders offering these deals include Northern Rock, Portman and Alliance & Leicester. They say these are niche products for a very few customers and that all restrictions are pointed out before someone signs up.

This doesn't convince some mortgage experts. 'Mortgages with these types of tie-ins are a dreadful product,' says Simon Jones, a director of Savills Private Finance. 'It is arguably the worst time to buy such a mortgage because interest rates are expected to rise, yet you can't get out of the agreement without paying horrendous penalties.'

He gives the example of someone with a £200,000 mortgage who would be paying roughly £200 a month on a very cheap, low-start mortgage, but whose repayments could soar to £900 a month once the fixed period ended.

Ray Boulger says people tend not to budget for future rises. 'If you can afford to build up savings during the fixed-rate period then you shouldn't be on this sort of loan. These mortgages are designed to allow lenders to advertise cheaper rates but most of the advertisements do not make clear what the redemption penalty is. There are very few people for whom they are suitable.

'At the moment the Financial Services Authority does not regulate mortgages but when it does redemption penalties will have to be much more clearly explained.'

Alliance & Leicester has a mortgage with a rate of 1.25 per cent for the first two years, then a four-year tie-in on the SVR. Sally Lauder, press manager, says: 'It is a niche product for customers who have special circumstances and who want rock-bottom rates for a fixed period. If, for example, you were doing a lot of renovation on your house and you needed the money for that, or you knew you would get a promotion in the next couple of years, it might be suitable. We would always give full information on the product although we wouldn't be able to tell you what the SVR was going to be.'

Ron Stout, spokesman for Northern Rock, says: 'More of our customers are opting for flexible products which allow them to overpay their mortgage. We will quote customers the fixed-rate payment for the first two years and inform them what their payments will be when the SVR applies. Towards the end of the benefit period we write to customers to tell them what the new rate will be.'