The mortgages that will see you through a rate rise

With talk that the base rate could rise this year, mortgage rates could soon follow. We take a look at the mortgages that can help ride out the transition.

Since March 2009 the Bank of England has held the base rate at a record low of 0.5%. Consequently, mortgage rates have tumbled to levels never seen before.

While no-one knows quite when base rate will start to creep up, there were fresh hints this week that it may be coming sooner than you think. The money markets have been gearing up for the first increase to come in the first quarter of 2015, but the Governor of the Bank of England, Mark Carney, and his Monetary Policy Committee (MPC) have cast fresh doubt over this timeframe.

The minutes of the June MPC meeting revealed the Bank’s rate setters were ‘surprised’ at the low probability the markets had attached to the base rate rising this year. Governor Carney, in his Mansion House speech, echoed this sentiment when he said "[a rate rise] could happen sooner than markets currently expect". Read more in What next for inflation and interest rates?

So with a rise anticipated sooner, but still no solid information on the exact date, what should those looking for a mortgage now consider to ride out this uncertain environment?

Tracker vs fixed rate deals

Undoubtedly the safest bet given the uncertainty over the base rate is a fixed rate mortgage.

This type of deal can shield you from the impact a rise may have on mortgage interest rates, as you can lock into a deal you know you can afford for a number of years.

However this peace of mind comes at a premium, more so on longer lasting deals, and many have steep early repayment charges (ERCs), a fee you have to pay for leaving the your mortgage early. So you won’t have much flexibility should your circumstances change.

Two- and three-year deals tend to be the most popular, however five- and ten-year fixed rate deals can help you lock into 2014 rates for longer.

That said, some borrowers might prefer to stick with a tracker mortgage to take advantage of lower monthly repayments in the lead up to a rate rise.

These are variable rate deals which track an agreed percentage above the Bank of England base rate, so your repayments rise and fall as base rate does. These tend to be cheaper than fixed rate deals and many come with lower or no early repayment charges, but they don’t offer the same peace of mind as a fixed rate.

Trackers come in two main forms. There are those that track a set percentage above base rate for a set period (for example, two years), before moving onto the lender's standard variable rate (SVR), which can be changed at any time irrespective of what's happening with base rate. And then there are lifetime trackers, which (as the name suggests) track a set percentage above base rate for the entire lifetime of the mortgage.

It might seem odd to go for a mortgage that is only set to get more expensive, but the flexibility of this sort of deal means you can take advantage of lower repayments for longer and switch when the time is right. Given the Bank of England has stated that when rate rises come they will be small and gradual, a tracker deal could be cheaper for long enough to be worth taking.

Unfortunately, tracker mortgages are disappearing. Some of Britain’s biggest mortgage lenders like Lloyds and Halifax have stopped offering them as demand has dried up and people turn to fixed rate deals in the panic around interest rate rises.

According to Moneyfacts there are just 301 variable rate deals today, compared to 409 a year ago.

The cheapest deals

If you're thinking of buying a home or need to remortgage, you should carefully consider which sort of deal will be best for you to cope with the looming rate rise.

Here are some of the best offers across tracker and fixed rate options.

Best two-year trackers

Two-year tracker rates aren't as cheap as two-year fixes at the moment, but you might prefer the lower ERCs. If you want to try your luck, here are the best rates across a range of LTVs.

Provider	Term	Rate	Fee	LTV	ERCs
Post Office	Tracks base rate until 31/08/2016	1.74% (BoE base rate + 1.24%)	£995	60%	3% of the sum repaid until 31/08/2016.
Chelsea Building Society	Tracks base rate until 31/07/2016	1.84% (BoE base rate + 1.34%)	£345	65%	1% of sum repaid until 31/07/16
Post Office	Tracks base rate until 31/08/2016	1.95% (BoE base rate + 1.45%)	£995	70%	3% of the sum repaid until 31/08/2016.
Tesco Bank	Tracks base rate until 31/08/2016	2.15% (BoE base rate + 1.65%)	£995	80%	2% until 31/08/2016
Virgin Money	Tracks base rate until 01/09/2016	2.19% (BoE base rate + 1.69%)	£995	70%	1% of outstanding balance
Tesco Bank	Tracks base rate until 31/08/2016	2.45% (BoE base rate + 1.95%)	£995	85%	2% until 31/08/2016
Hinckley and Rugby	Two years	3.69% (Base rate plus 3.19%)	£990	90%	None

Best lifetime trackers

There aren't too many lifetime tracker deals around at the moment, but the fact that most don't charge ERCs means they are still worth looking at. Here are the best rates I was able to find across a range of LTVs.

Provider	Term	Rate	Fee	LTV	ERCs
HSBC	Lifetime tracker	1.99% (BoE base rate + 1.49%)	£999	60%	None
HSBC	Lifetime tracker	2.19% (BoE base rate + 1.69%)	£999	70%	None
Santander	Lifetime tracker	2.49% (BoE base rate + 1.99%)	£495	75%	None
HSBC	Lifetime tracker	2.59% (BoE base rate + 2.09%)	£999	80%	None
HSBC	Lifetime tracker	4.19% (BoE base rate + 3.69%)	£999	90%	None

Best two-year fixed rates

There are over 1,000 two-year fixed rate deals to choose from at the moment according to Moneyfacts. At the moment these rates are beating two-year trackers, however ERCs and other fees may be more expensive. Here are the best rates across a range of LTVs.

Provider	Term	Rate	Fee	LTV	ERCs
West Brom BS	Fixed until 31/08/16	1.58%	£2,499	60%	3% until 31/08/2016
Post Office	Fixed until 31/08/16	1.63%	£1,995	65%	3% of the sum repaid until 31/08/2016.
Post Office	Fixed until 31/08/16	1.88%	£1,495	75%	3% of the sum repaid until 31/08/2016.
Norwich & Peterborough BS	Two years	1.99%	£1,295	70%	2% in year one 1% in year two
Norwich & Peterborough BS	Two years	2.19%	£1,295	80%	2% in year one 1% in year two
Chelsea BS	Fixed until 31/07/16	2.74%	£1,675	85%	2% to 31/07/15 1% to 31/07/16
Chelsea BS	Fixed until 31/07/16	3.44%	£1,675	90%	2% to 31/07/15 1% to 31/07/16

Best five-year fixed rates

According to Moneyfacts there are 656 five-year fixed rate deals available right now, up from 639 available this time last year. These tend to be more expensive than lifetime trackers, but offer more peace of mind. Here are the cheapest rates I could find across a range of LTVs.

Provider	Term	Rate	Fee	LTV	ERCs
HSBC	Fixed until 30/09/2019	2.94%	£1,499	60%	1% of the amount overpaid, multiplied by remaining years left of the deal.
Tesco Bank	Fixed until 31/08/2019	2.99%	£1,495	70%	5% until 31/08/2015 4% until 31/08/2016 3% until 31/08/2018 2% until 31/08/2019
Chelsea BS	Fixed until 31/07/2019	3.04%	£1,545	65%	4% to 31/07/16 3% to 31/07/17 2% to 31/07/18 1% to 31/07/19
Post Office	Fixed until 31/08/2019	3.15%	£995	75%	5% of the sum repaid until 31/08/2019.
Post Office	Fixed until 31/08/2019	3.45%	£1,495	80%	5% of the sum repaid until 31/08/2019.
Post Office	Fixed until 31/08/2019	3.59%	£1,495	85%	5% of the sum repaid until 31/08/2019.
Chelsea BS	Fixed until 31/07/2019	4.24%	£1,545	90%	4% to 31/07/16 3% to 31/07/17 2% to 31/07/18 1% to 31/07/19

Best ten-year fixed rates

You'll pay a bigger premium to lock-in for ten years and some hefty ERCs will apply, but here are the cheapest rates I could find across a range of LTVs.

Provider	Term	Rate	Fee	LTV	ERCs
Woolwich	Fixed until 30/06/2024	3.89%	£1,499	70%	6% of the balance repaid until 30/6/21 and 3% of the balance repaid until 30/6/24
Norwich & Peterborough BS	Ten years	4.19%	£0	75%	7% reducing to 1% in year ten
Newcastle BS	Fixed until 30/06/2024	4.49%	£598	80%	5% of the amount repaid if redeemed on or before 30/6/19
Leeds BS	Fixed until 31/08/2024	4.59%	£199	65%	6% in years one and two, 5% in years three, four, five and six, 4% in years seven and eight, 3% in year nine and 2% in year ten.

See the latest mortgage rates and get expert advice

This article aims to give information, not advice. Always do your own research and/or seek out advice from a regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

More on mortgages:

Help to Buy mortgages explained

Seven reasons mortgage lenders turn you down

Interest-only mortgages: the banks that will still lend