Borrowers in a fix on long-term deals: Offers on fixed-rate mortgages seem set to creep higher by year's end, writes Neasa MacErlean

FIXED-RATE mortgage deals have started to become more expensive, and experts believe that rates could be significantly higher by the end of the year.

In the past week, many five- year rates have passed 8 per cent. 'By the end of the year, an 8 per cent rate for five years will look very good indeed,' said Phillip Cartwright of London & Country Mortgages. By Christmas, he thinks five-year rates may be 9 per cent.

The rise has been caused by a hardening in the money markets, where mortgage lenders borrow funds from which they lend to home buyers. Rises on five-year rates do not reflect an expectation of an imminent rise in base rates so much as general uncertainty about the future.

At present, more than half of new mortgages are on a fixed- rate basis. The most popular period for a fixed-rate mortgage in the past few weeks has been five years. Until last week, the five- year rate from most lenders has been roughly the same as the current variable rate - about 7.99 per cent.

Ian Darby of John Charcol, the mortgage broker, believes that the five-year fix may become less popular: 'As a borrower, if you want a five-year fixed rate, you've got to make a conscious decision to pay more than the variable rate.' He thinks that the three-year fix may now overtake the five-year in popularity because many borrowers will be unable to cross the 'psychological barrier' of paying more on their fix than the current variable rate.

Banque Nationale de Paris is typical of the current mortgage market in offering a three-year fix pegged at 7.99 per cent - the same rate as the current variable. More competitive rates are available if you look. The Leeds Permanent, for instance, offers a 7.50 per cent fix to existing clients who borrow 95 per cent of the purchase price.

But John Charcol believes that, in the long term, many borrowers may regret a decision to go for a short-term fix. A one-year fix at 4 per cent will leave borrowers exposed to the full volatility of the markets after a relatively short period of time.

The Portman Building Society has just put up its five- and 10-year fixes - by 0.74 of a percentage point each - to 8.99 per cent and 9.99 per cent respectively. But the society believes that, despite the increase, the rates will prove to be a bargain by the end of their run. 'The last time annual rates fell below 10 per cent was in 1974,' a spokesman said.

The borrowers being penalised the most are those who have to borrow a high proportion of their property's value. The Britannia Building Society, for example, still offers a 7.99 per cent five-year fix to those who pay a 40 per cent deposit. The rate is set at 8.80 per cent, however, for people who pay only a 5 per cent deposit.

For four years, Britannia offers 8.55 per cent on a 5 per cent deposit and 8.25 per cent on a 15 per cent deposit.

Nationwide Building Society also offers different rates according to the size of the deposit. Existing borrowers get a five- year fix at 8.69 per cent for deposits between 15 per cent and 25 per cent, or 8.59 per cent if they have at least 25 per cent to put down.

New borrowers pay 8.79 per cent with a deposit of 25 per cent, and 8.99 per cent with between 15 and 25 per cent.

The number of fixed-rate mortgage products available from the large lenders has declined over the past month from more than 100 to about 80. The Cheltenham & Gloucester, for example, withdrew its 7.95 per cent five-year fix at the end of April and has yet to replace it. It will bring out another five-year mortgage soon but believes that money market rates are currently too unsettled for it to re- enter the market at this point.

More than half those who took out a five-year fix with Cheltenham & Gloucester in the past were remortgaging their properties. People in this sector generally need to be aware of the dangers of over- estimating the current worth of their properties. If the mortgage loan they are seeking is, for example, 95 per cent of the property value rather than 85 per cent, they will find that many lenders now charge a higher rate of interest.

The property market may be picking up, but it is not getting any simpler.

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