Money: It's fine to be in a fix but don't pay the penalty later

IF YOU are still paying headline interest rates on your mortgage you're in an oppressed minority. Research from the lenders' industry body, The Council of Mortgage Lenders (CML), has found that as many as seven out of 10 home owners are paying "non-standard" - lower - borrowing rates.

The figures show that most of us have realised there's no need to stick with the standard deals and help subsidise other people's cheap mortgages. We're piling into fixed-rate and discounted mortgages in droves: for example, 44 per cent of all loans taken out in the year to June 1997 were discounted.

The tricky part comes when your discounted or fixed-interest period ends. You'll then discover that in the small print on your mortgage contract it probably states that you have to pay standard variable mortgage rates for several years. To get out of this "lock-in" period will cost you a hefty sum.

Lenders force you to pay standard rates for a period in a bid to make more money from you. Many of the cheap loans around at the moment don't make much profit for lenders, so they have to take a long-term view and trap you at the end. This jump to standard mortgage repayments, which are higher at present, is being dubbed "payment shock" by people in the mortgage industry.

Going on to variable interest rates can come as a jolt to the finances. The CML reckons that the average borrower ending a fixed or discounted mortgage deal and starting to pay standard rates will be charged an extra 0.75 per cent, equivalent to pounds 28 a month on a pounds 50,000 mortgage. This doesn't sound crippling, but borrowers on standard rates also face uncertainty because of generally rising interest rates, over which they have no control. According to Moneyfacts, a mortgage and savings data company, the average standard mortgage rate rose from 7.23 per cent last January to 8.53 per cent in January 1998.

Then there's the continuing reduction in mortgage interest relief at source (Miras). This tax relief looks set to be abolished altogether, with some sort of announcement probable in next month's Budget. Paid on the first pounds 30,000 of your borrowing, Miras tax relief is already due to go down from 15 per cent to 10 per cent from April, increasing mortgage costs by an extra pounds 7 per month.

Almost half of the fixed-rate mortgages currently in force in the UK will come to an end by June this year, with another quarter finishing before June 1999. That's a lot of people who'll have to find more money - and for a long time. Independent mortgage specialist Lynn Foster, of Woodward Insurance & Mortgages, in Street, Somerset, says it's a common problem: "If you come off a 4.99 per cent fixed rate to an 8.4 per cent variable rate, that can mean a pounds 100 a month rise in mortgage payments."

Northern Rock, the building society turned bank, took a lot of criticism a couple of years ago for its long lock-in periods and hefty penalties. Ms Foster says the Tyneside-based bank hasn't got any better. "Northern Rock offers a two-year deal at 4.49 per cent. It sounds good, but you have to have compulsory insurance, which is something borrowers should be very aware of as it's expensive. After the two years you are locked into standard rates for four years. If you redeem the mortgage (by moving to another lender) during the four years you have to pay a 5 per cent penalty - so you'd pay pounds 2,500 on a pounds 50,000 loan."

Getting involved in this sort of deal is ridiculous when you can seek out a fixed-rate or discount with no compulsory insurance and no penalty. This will mean you can go straight into another cheap deal. Ms Foster recommends deals on offer from Nationwide, Portman, Halifax, Skipton and C&G to her clients.

Note, however, that lenders have penalty-ridden deals on offer alongside better, more flexible offerings. For example, in April last year, Nationwide BS launched a range of fixed and discounted deals with no lock-in period, no compulsory insurances and the arrangement fee refunded. The current selection offers a two-year fix for 6.39 per cent if you can put down at least 10 per cent of the property value as a deposit. Compare that with Nationwide's standard two-year fixed deal, still on offer, which charges just 5.49 per cent but forces you to move on to standard rates for three years after the fix.