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Mortgages - to fix or not to fix?

Mortgages - to fix or not to fix?

Category: Mortgages

Updated: 31/10/2008
First Published: 26/09/2007

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

More than 250,000 borrowers will see their two-year fixed rate loans come to an end before the end of the year. Fixed rates were much cheaper two years ago, with an average two-year fixed rate deal standing at around 4.5%. Current fixed rate deals could mean an increase in repayments of around £230 per month for a homeowner borrowing £120,000.

The five interest rate hikes by the Bank of England since August last year can be blamed for the surge in mortgage prices, but with the Bank of England continuing to keep the interest rate on hold at 5.75%, and with confusion in the money markets, many experts are suggesting that interest rates have hit their peak. If the experts are right, then many mortgage borrowers could find that taking out a variable rate mortgage rather than fixing their deal should see their monthly mortgage payments fall.

Variable rate mortgages essentially work in two ways. They can be either tracker mortgages, which are linked to the Bank of England's base rate, or they can be discounted mortgages, which offer a discount on the lender's standard variable rate (SVR).

Because tracker mortgages are linked to the base rate, mortgage repayments can go down as well as up. The rates on these deals are often set around the base rate (currently 5.75%), but they do come with high fees or charges. Discounted mortgages are tied to the lender's SVR, so while they would usually move with the base rate change, it is up to the lender when they choose to reprice their discounted deals. However, discounted deals are usually cheaper than trackers

If however, you have worries about affordability or you want to be sure your mortgage payments remain set each month, then taking out a fixed rate mortgage is more for you. But remember, fixed rate deals have become much more expensive over the past year, so you could find yourself paying well over the odds in a few months.

So if you are coming to the end of your mortgage deal, weigh up how much you can afford each month, and what your attitude to risk is. Most advisers recommend that you apply for a mortgage at least two months before your current deal ends, so search for a mortgage tailored to your needs and grab one today!

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.