Turmoil threatens fixed-rate mortgages: With interest charges in a state of flux, the advice to borrowers is 'wait'. Vivien Goldsmith reports on the prospects for home loans

HOME buyers have been unnerved by lurching interest rates and have been flocking to take up fixed-rate mortgages - just when rates look likely to fall.

But on Wednesday, as interest rates rocketed up to 12 and then 15 per cent, the fixed-rate deals were being withdrawn from the market. So mortgage brokers and building societies have little to offer.

Nationwide allocated pounds 50m on a special offer to existing customers of a three-year fixed-rate mortgage that started at 8.95 per cent and rose to 9.95 per cent for the second and third year. There was a non-returnable pounds 250 fee,

'If people change their minds, then they will have to forfeit the fee,' a Nationwide spokesman said.

Ian Darby of the mortgage brokers John Charcol said: 'The stock market on Friday seems to be indicating that a base rate cut is on the way. But a lot can happen between now and next week when the results of the French referendum on Maastricht are known.'

Although he is usually a great advocate of fixed-rate mortgages, the advice this weekend is 'sit tight'. 'Fixed rates might look expensive in a couple of weeks' time.'

But he is keen on a cap and collar deal, which gives a maximum rate of 10.95 per cent and a minimum of 6.95 per cent over the next three years. This offers the comfort of protection from any nasty sudden shocks but allows for falls if rates drop.

But even if there is a 2 per cent cut in base rates to 8 per cent, home owners should not expect a straight 2 per cent cut in mortgage rates. The banks and building societies will be keen to take the opportunity to widen their margins. Halifax, for instance, announced this week that the margin between its mortgage and savings rates had been cut back from 2.15 to 2.04 per cent.

In 1988, when base rates were 9 per cent, the mortgage rate was 10.3 per cent, but when base rates fell to 7.5 per cent, the mortgage only fell to 9.8 per cent.

Peter White, chief executive of Alliance & Leicester, said that if base rates fell to 8 per cent, he would expect a mortgage rate of 9 per cent.

Lenders have been keen to keep mortgage rates as low as they can for fear of killing the property market stone dead. But as soon as interest rates fall they will want to regain some of their room for manoeuvre.

The first-time buyer's discounts and other money-off for the first-year-type offers that have kept the cost of mortgages for new borrowers down are likely to be chopped back, and some may disappear altogether, although lenders are still keen to entice new buyers into the housing market to try to get houses moving.

Scarborough Building Society still has a six-year deal with a 1 per cent discount for the first year, followed by a 0.5 per cent discount for the next five years.

If mortgages did come down by a full 2 percentage points, the the monthly payments on a pounds 60,000 Abbey National interest-only mortgage would fall by pounds 87.50 from pounds 446.25 to pounds 358.75. A 1.5-point cut would bring a saving of pounds 65, and a 1-point cut a pounds 43.75 saving. On a pounds 100,000 loan a 1-point cut would mean a saving of pounds 77.08 on the payments of pounds 770.06 a month, while a 1.5 points would save pounds 115.63, and 2 points would make a difference of pounds 154.17.

Richard Bolton, chief economist at Abbey National, believes it likely there will be a rate cut next Tuesday or Wednesday, probably a large one. This would have the advantage that the market would accept it as a stable situation, whereas a small, half-point cut would not be enough to move mortgage rates and would leave lenders waiting for the next cut before making a move themselves. Building societies will certainly move rates down if there is a 1-point cut, but few will want to move on half a point.

Simon Tyler of the brokers Chase de Vere believes there will still be a demand for fixed-rate mortgages even if rates start to fall. 'It may be irritating to pay 10.65 per cent while all around are paying 9 per cent, but at least you can afford it, and you know you can still afford it and keep your home if rates start going up.'

Europe Assistance, which runs telephone debt counselling lines for several mortgage lenders including Halifax and the Mortgage Corporation, said there was a flurry of calls in the middle of the week from people who feared that they could not cope with higher mortgage rates. On Wednesday there was a 34 per cent increase in calls, most of them made between 4pm and 8 pm.

Shelter, the organisation that campaigns for the homeless, calculates 305,000 households have mortgage debts of more than six months, 113,000 of them for a year or more.

About 37,000 households are already under suspended repossession orders.

Debt counsellors say many more mortgage holders are teetering on the verge of repossession, only just making ends meet.