They are more expensive, but fixed rates may be safer in uncertain times. Jeremy Gates looks at the options

BRITAIN’S lowest ever Bank base rate of 0.50% celebrated its first birthday last week, and while it has provided an easy ride for borrowers on cheap variable rate (SVR) mortgages, savers, however, saw their income almost wiped out.

Moneysupermarket.com’s Hannah Mercedes-Skenfield says: “Many borrowers are sitting on extremely low SVR rates, which many took when fixed rate loans came to an end, and they have no incentive to move.”

Nationwide BS confirms the trend, and in its latest market bulletin says: “Since mid-2009, there has been a steady increase in the proportion of new loans taken out at variable, rather than fixed, rates.

“In July, the proportion of new loans taken out on base-rate tracker or discounted variable rate deals hit a low of just 14%. By December, it rose to 39%, with fixed rate deals down from 80% to 54% in the same period.”

Nationwide thinks buyers like variable rate loans because they want to keep more of their income each month. Figures suggest fixed rate loans cost 1.58% more than variable rate deals.

Lenders, though, are starting to cut the cost of fixed rate loans, and are launching them as a safe haven for borrowers unnerved by the sliding pound, general election jitters and the long-term implications of Britain’s massive debts.

Post Office Mortgages’ new range of 75% LTV (loan to value) loans includes a 3.19% tracker and two, three and five-year fixes from 3.89%.

Marco Hughes, Post Office’s personal lending director, says: “If you’re thinking about switching your mortgage, now is the best time to do it, before rates rise further. With many SVRs at or above 4%, there are already better deals out there.”

Martijn van der Heijden, head of mortgages at HSBC, says: “Mortgage rates are difficult to predict over the next few years, and volatility may be unavoidable. Borrowers who can’t absorb an increase of up to 3% on their rate should seriously look to fix payments.”

HSBC fixed rate mortgages range from two years at 3.69%, to five years at 5.29%.

First Direct, HSBC’s online subsidiary, has a new lifetime tracker mortgage (maximum LTV 85%) at 3.99%, currently 3.49% above the Bank base rate. Borrowers with a 35% deposit (LTV 65%) pay 2.39%.

First Direct also levies no early repayment charge if borrowers want to get out, possibly when rates rise, and into a fix.

Chelsea BS has new fixes too: 4.69% for five years to a maximum 75% LTV, or 5.04% for an 80% LTV.

Andrew Paddock, Chelsea BS mortgage product development manager, says: “With so much speculation about future levels of inflation and mortgage rates, people welcome an opportunity to fix payments at a competitive rate for five years.”

Santander, supplier of one-in-five new mortgages in 2009, is cutting rates on 80% LTV deals: a two-year tracker at 3.25% for two years, and a two-year fix at 4.95%, with £995 fees, are for purchasers, rather than remortgagers.

In economic crises, variable rate loans can go wrong: Halifax SVR customers paid a stonking 15.4%, a record, in March-October, 1990.

No one expects a repeat of that any time soon, and Barclays predicts the base rate could reach 6.5% in the next five years.

However, there are severe problems in the mortgage market. Over the next four years, some £300bn in government support to lenders, in the form of the Special Liquidity Scheme and Credit Guarantee Scheme, must be repaid. That suggests volatility in mortgage rates for years to come.

David Hollingworth, at brokers L&C Mortgages, says: “The gap between fixes and variable rate mortgages is narrowing. People who want to know exactly where they stand tend to choose a fixed rate loan.

“But trackers, linked to the base rate, have attractions for borrowers who can absorb changes in monthly payments. Trackers are currently available at 2-2.5% over base rate, meaning a current pay rate of 2.5-3%.

“Britannia/Co-Operative Bank has a new two-year fix at 3.19%, to a maximum LTV of 75% with a £99 fee, and Yorkshire BS has a 3.09% two-year fix, with a 60% LTV limit.

“For five-year fixes, expect to pay an extra 1.5% on the rate. HSBC at 4.64% is probably the cheapest, on a 60% LTV. Chelsea at 4.69% has a 75% LTV with a £999 fee.”

For borrowers seeking security after the election, L&C has an exclusive: a two-year 3.60% fix, up to 80% LTV, with £1,094 fee.

At brokers Charcol, Ray Boulger says: “It is probably still right to stay on a tracker, but turbulence on the foreign exchange markets shows clearly where risks to our economy lie, and that risk is partly political.

“For some weeks, we will be susceptible to opinion polls, and Greece shows how markets get the bit between their teeth if they decide a country is in difficulty.

“Our difficulties are less severe than Greece, but for a hung Parliament or a Labour win – which could mean Mr Brown staying as Prime Minister and possibly not Mr Darling as Chancellor – a long-term fix of five years has attractions. You can get them under 5%, with a reasonable amount of equity.

“Darlington BS has a five-year fix at 4.99%, with LTV up to 80% and fee of 1% plus £75.

“For an overall Conservative majority or coalition, suggesting earlier action to tackle Britain’s debts, consider lifetime trackers, but look out for a possible early repayment charge if you want to get out and into fixed payments. There are trackers with no penalty charge after two years.

“Both Nationwide and Scottish Widows have trackers with this so-called droplock option, which lets you switch into a fix at any time with no charge. Nationwide loans start at the Bank base rate plus 2.14%, up to 70% LTV, with a £995 fee.

“ITL Mortgages (part of Stroud & Swindon BS) has a lifetime tracker of base rate plus 3.39% – currently 3.89% – capped at 5.89% to January 31, 2013. The cap means you cannot pay more than that for three years.”

Andrew Hagger at Moneynet.co.uk points out that borrowers leaving variable rates for trackers and fixes should always check to see if the new loans limit the level of overpayment allowed each year; on SVR loans, there is rarely any limit.

INFORMATION: HSBC (0800 169 6333 and www.hsbc.co.uk); First Direc (www.firstdirect.com); Chelsea (0800 169 1177 and www.thechelsea.co.uk); Santander (0800 389 6704 and www.santander.co.uk); Post Office (0800 707 6204 and www.postoffice.co.uk/mortgages or from any Post Office branch); L&C Mortgages (0800 373 300 and www.lcpl.com); Charcol (0800 718 191 and www.charcol.co.uk).