Sam Dunn: 'What shall I do now my fixed rate deal is over?'

House Doctor
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The Independent Online

Question: I'm near the end of my cheap 4.49 per cent fixed rate mortgage deal and am very confused about whether to go for another fixed – more expensive now – or get a cheaper variable rate or tracker. Should I just go for the lowest rate I can get at roughly 75 per cent loan-to-value (LTV), given that the Bank base rate appears glued to 0.5 per cent?

Mary G, Birmingham

Answer: Each week, lenders re-price the cost of home loans as they wrestle with tentative house price rises, changes to "swap" rates (the cost of lending to each other), regulatory financial safety requirements (to have adequate capital in place), and pressures on margins (shoring up the bottom line). Which leaves customers in a bind: with lenders jittery and the mortgage market in turmoil, choosing a deal can make your head spin.

However, warns Katie Tucker at Mortgageforce broker, your sentiment towards security should make this an easy decision. "This is about your attitude to risk: it sounds like you would prefer the peace of mind of a fixed rate," she says. "Whilst the Bank is expected to keep base rate low for another six months – keeping variable mortgage rates low – you must calculate whether you can afford the payments on a variable rate loan if the rate rises by 2 or 3 per cent."

This is the acid test: how close to the financial precipice are you? Mervyn King, Governor of the Bank of England, has dropped strong hints that base rate will stay as low as 0.5 per cent until the end of 2009. But what if spiralling inflation hastened a rate rise, or an unknown shock precipitated a rapid tightening of base rate? Could you afford a 4.5 point rise over six months on a variable mortgage – the rate at which they moved in the opposite direction last year?

If you'd struggle, pick another fix, agrees Richard Morea at broker London & Country: "If your budget is tight then set repayments is your best option." Recent figures from Moneyfacts suggest the average rate on two-year fixes hovered at 5.18 per cent – higher than your current fix but competitive. That said, if your budgeting can absorb swift rises in base rate, a variable rate deal will work out cheaper.

Although your 75 per cent LTV disqualifies you from HSBC's dirt-cheap two-year discount variable-rate deal with a starting rate of 1.99 per cent (you'd need 60 per cent LTV), you could get the same deal at 2.49 per cent. Be careful, though: there's a £1,199 fee and early redemption charges. Compare at http://compare.independent. co.uk or Moneyfacts.co.uk.

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