Why we avoided the tie-in mortgage trap

The scourge of all householders - mortgages that lock borrowers into high interest rates after a special deal has come to an end - is making an unwelcome comeback.

In recent years, these much-criticised loans had all but disappeared. But as lenders struggle to shore up profits in the wake of the credit crunch crisis, the deals are starting to emerge again to haunt homeowners.

A number of high-profile lenders have reintroduced the deals - known as loans with 'overhanging redemption penalties' - that offer low initial fixed-rates for a set period.

Borrowers are tied into paying a higher standard variable rate for years after that special rate has expired. And the only way they can extricate themselves is by paying a stiff redemption penalty.

Barclays-owned Woolwich and building societies Norwich and Peterborough and Market Harborough are among those offering these mortgage deals.

Market Harborough tempts borrowers with a rate of 2.85% fixed for two years, but they are then tied in for a further three years during which they must pay the lender's SVR - currently 7.55%.

This means a homeowner taking out a £100,000 interest-only mortgage would pay £237.50 a month for two years. But then, assuming the mortgage rate has not changed, monthly payments would nearly treble to £629.

A borrower trying to get out of the loan in years one to five would be required to pay a penalty equivalent to between four% and seven% of the outstanding mortgage sum borrowed.

The £100,000 borrower would pay a penalty of £7,000 in total in years one, two and three, falling to £5,000 in year four and £4,000 in year five.

Market Harborough says the loan appeals to many first-time buyers looking to keep down initial mortgage costs. It also says that borrowers are left in no doubt about the length of time that early redemption penalties apply.

But David Hollingworth, head of communications at mortgage broker London & Country Mortgages in Bath, Somerset, says: 'This deal is prehistoric in structure. We rarely, if ever, recommend mortgages with such costly tie-ins.

'Borrowers considering such loans must be aware of their inflexible nature and question their real value.'