Fix your mortgage rate at 4.86%

The big lenders are rushing to cut prices for fixed mortgage deals - but is it worth paying a premium to enjoy peace of mind? Mark Adams finds out.

There have been a couple of pieces of good news - at last - this week for hard-pressed homeowners. The first is new figures from the Bank of England showing that mortgage payers are finally benefitting from the series of interest cuts put in place at the start of the year.

The Bank's Quarterly Bulletin shows that that half of all UK households are now paying £100 less on their monthly mortgage repayments, and a quarter have seen their monthly payments fall by £200.

Most of those borrowers who have seen their monthly repayments fall are those on variable rate deals that follow the Bank of England base rate but, in the second piece of good news, other mortgage deals are now falling in price. The past week has seen a spate of price cuts on fixed-rate mortgage deals by many of the UK's biggest lenders. 

Mortgage giant Nationwide led the way when it cut the price of many of its fixed rate deals for purchases by up to 0.24%. Rival lender Halifax soon followed suit by taking 0.20% off many of its fixed-rate home loans, while other lenders including the Yorkshire Building Society, Abbey and Alliance & Leicester have reduced prices by between 0.20% and 0.30%.

The biggest cut, meanwhile, came from the Post Office, which lowered its rates on fixed deals by up to 1.3%. Figures from data analysts Moneyfacts show that the average price for a fixed-rate mortgage is now just 4.86%, a level not seen since August.

Over the past year the majority of borrowers have opted for tracker or variable rate mortgage deals following the drop in interest rates to an all-time low of 0.5%. Yet will it be worth switching to a safer type of mortgage in 2010? Or will interest rates remain at their record low level? We ask the experts.

Fix or track?

The advantage of taking out a fixed-rate mortgage deal is the certainty that comes with knowing that your monthly repayments will remain the same whatever happens to interest rates - but buyers pay a premium for this peace of mind. It's not just the interest premium to take into account, but also the cost of mortgage 'booking' or 'arrangement' fees.

These fees are charged when you first take out a mortgage and can be as much as £1,495 for a fix for just two years. More competitively priced fees ranged somewhere between £500 and £1,000 - so is it worth paying a premium upfront to ensure your monthly repayments don't soar if interest rates surge?

Arguably, the best strategy is to opt for a deal that follows the Bank of England base rate in the short-term. Apart from a couple of deals with very large arrangement fees, two-year and three-year fixed-rates cost around 1% more than the best two-year tracker deals, which are priced at 1.99% above base rate.  

The best short-term trackers currently available are from Newcastle Building Society and First Direct. The Newcastle Tracker offers a rate of 2.49% (1.99% above base rate) until March 2012 and is available to buyers with a deposit of 20% or more - expect to pay a £994 arrangement fee. The First Direct deal offers an overall rate of 2.58% with a £999 arrangement fee - but do be aware that a deposit of at least 35% is required.

But remember, these trackers tie you into following the base rate for two years. So what's going to happen to interest rates over that period?

Well, the majority of experts believe the chance of any significant rises in interest rates next year has fallen in recent weeks as the UK economy remains mired in recession. Some economists including Howard Archer of IHS Global Insight suggest that we won't see the base rate rise until the final quarter of 2010.

Beyond that, interest rate movements are harder to predict - although one thing's clear: the only way is up.

So borrowers who want peace of mind they won't suddenly have to face a hike in their monthly repayments may want to consider a fixed rate deal instead of a tracker. And by fixing for, say, five years, you save on all those remortgage fees. The best offer at the moment for a five-year fix is 4.89% from Newcastle Building Society, available up to 80% LTV with an arrangement fee of £588. 

Wait and see?

If you're current mortgage deal is set to come to an end, it may even be worth reverting to your lender's standard variable rate (SVR) for a few months, at least until the future direction of interest rates becomes clearer. The cheapest SVRs around will see you pay between 1.99% (Woolwich), 2.5% (Nationwide, Lloyds TSB) and 3.5% (Halifax) and you won't have to pay any fees. 

However, if your SVR is over 5%, you could save hundreds - if not thousands - of pounds by switching to a cheaper deal. Use our mortgage calculator to see how much you could save by remortgaging or use our innovative online mortgage search tool to find the best deals from across the whole of the market.

Find the best mortgage for you online via lovemoney.com

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.