Is it all over for the fixed rate?

Home buyers are turning to variable, tracker or offset mortgages, writes Stephen Pritchard

ixed-rate mortgages offer certainty. But for many home buyers the fact that the Bank of England has held interest rates steady for the last 11 months in a row makes it harder to justify paying a premium for fixing their mortgage.

That premium has also risen recently, making fixed rates look less attractive than other deals, especially tracker mortgages.

Nationwide's five-year fixed-rate mortgage recently increased from 4.69 per cent to 5.18 per cent. Few five-year fixed-rate mortgages are on offer now for less than 5.0 per cent. One of the best deals is the Britannia's, at 4.99 per cent, according to financial researchers Moneyfacts.

Why are fixed rates going up when interest rates are steady?

Lenders fund fixed-rate deals by borrowing through the money markets.

Interest rates are likely to rise this year. This is priced into the wholesale money market or "swap" rates lenders use to fund their mortgage business.

"Global economics plays a part in this," says Andy Gray, head of mortgages at the Woolwich. "The US Federal Reserve is predicting more inflation and higher interest rates, and the markets are pricing that in now."

Swap rates are also showing a flat yield curve. This means the difference between short- and longer-term fixed rates is relatively small. This is why Nationwide's three-year rate is 5.13 per cent, against 5.18 per cent for a five-year deal, but also why Leeds Building Society can offer a 10-year rate at 4.99 per cent.

Are trackers better?

Woolwich has a lifetime tracker set at 0.24 per cent above base rates - a 4.74 per cent interest rate.The best straightforward trackers - rather than discount trackers - have no ties. If interest rates rise, or if you move house, there are no penalties for switching to another mortgage.Nationwide, offers the facility to switch to a fixed rate at any time.

Is it worth the effort to chase the best rates?

The recent rises in swap rates have made fixed-rate deals look unattractive, but to some extent the bad news is already priced in.

If interest rates do increase, so will variable and tracker mortgages. But the cost of a new fixed rate might not go up, because the markets have anticipated the increases.

Although fixed rates have gone up recently, five-year fixed rates have been stable over the longer term. In the late 1990s five-year fixed rates were around 6 per cent (see table).

House price increases means a small difference in the headline interest rate makes a larger impact in monthly payments. So a small saving in rates equates to a large difference over the loan's lifetime.

Is there no case at all for a fixed rate?

Fixed rates still make sense sometimes. Alliance & Leicester has a two-year fixed rate at 4.54 per cent and the Portman, 4.69 per cent, according to Moneyfacts.

Birmingham Midshires has a two-year tracker with a discount to base rates of 0.26 per cent, giving an interest rate of 4.24 per cent.

"It is tempting for people on tight budgets to go for the cheapest rate," says Melanie Bien, associate director at mortgage brokers Savills Private Finance. "But you have to consider the risk, if rates do go up."

If you need to know exactly what you'll be paying for your mortgage a fixed rate still makes a lot of sense.