Season of mist - and rising rates

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The Independent Online

Borrowers breathed a sigh of relief last week when the Bank of England announced it was freezing interest rates at 4.75 per cent.

In contrast, last month's surprise quarter-point rise caught out those homeowners who are on their lender's standard variable rate (SVR), or on discounted rates linked to an SVR. Those affected have been feeling the pinch since the start of this month, when their higher repayments kicked in.

Worryingly, borrowers not on a fixed rate may have worse to come. There is now widespread speculation that the base rate will rise again this year, with predictions of a hike in November to 5 per cent.

That may tempt the more cautious borrower to rush back to fixed-rate mortgages, which offer the security of unchanging monthly repayments.

However, while fixes might seem attractive at the moment, there are better deals to be had in other forms of home loan.

"For those who can afford it, trackers are still [a better] option than most fixed-rate mortgages in the current market," says Drew Wotherspoon from John Charcol, a broker.

While a tracker will rise when interest rates rise, homeowners who take out such a loan will know exactly what the increase is going to be, as the lender has to move in line with the Bank base rate.

"Trackers will continue to be a good option unless base rate rises above 5.25 per cent - which won't happen in the near future," Mr Wotherspoon adds.

He suggests that those with smaller-sized loans should look at a two-year tracker deal from Alliance & Leicester at 4.53 per cent. It is available for mortgages up to 90 per cent loan-to-value (LTV) and carries a £599 application fee.

Elsewhere, Derbyshire building society has a two-year tracker at 4.29 per cent. Borrowers need a 20 per cent deposit and there is a 0.5 per cent fee.

Melanie Bien from broker Savills Private Finance, adds that trackers proved popular in recent months because they were so much cheaper than fixed rates.

But she says: "August's rate rise means more borrowers are thinking about whether they should go for a fixed rate. Fixes are ideal for those who prefer the security of knowing their payments won't rise during the term of the deal."

Ms Bien picks out a two-year fix from the Portman building society set at 4.48 per cent for mortgages up to 95 per cent LTV, with a 1.5 per cent fee. She also likes the Yorkshire building society two-year fix at 4.49 per cent, with a maximum LTV of 95 per cent and a £470 fee.

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