To Fix Or Not To Fix?

With interest rates on the rise, is now a good time to fix your mortgage rate, or should you ride things out with a variable-rate deal?

Unless you're Rip Van Winkle or Sleeping Beauty and have been asleep for the past year, you'll probably have noticed that interest rates are on the rise.

There's a simple reason for this: the Bank of England has raised its base rate by a quarter point (0.25%) on five seperate occasions since August 2006. The Bank has done this to curb inflation, which is the tendency for consumer prices to rise over time.

Of course, as the Bank has hiked the base rate to its current level of 5.75%, borrowing from the Bank of England has become more expensive. Thus, British banks have passed on higher costs to their customers by pushing up borrowing rates. However, interest rates on credit cards and overdrafts have crept up only slightly (arguably, because they are already excessive). The real pain is being felt by people taking out unsecured personal loans, and to a much greater degree, homeowners and homebuyers.

For example, a year ago, the UK's biggest mortgage lender, charged a standard variable rate (SVR, the rate paid by all borrowers who don't have a special-rate deal) of 6.50% a year. As the base rate has risen, so too has Halifax's SVR, which is now 7.75% a year. With the base rate expected to hit 6% this summer, we can expect the Halifax and other major lenders to increase SVRs to around 8% soon.

Of course, most mortgage borrowers don't pay their lender's SVR -- in fact, you'd be mad to, given that it's normally a lender's highest mortgage rate! However, many have mortgages with rates linked to the underlying SVR, in the form of discounted variable, tracker or capped rates. Thus, when a lender's SVR increases, so too does the cost of these variable-rate mortgages.

So, does it make sense to avoid the pain of future rate rises by locking yourself into a fixed-rate mortgage now? This is a very difficult question to answer, because it depends on your own view on the future direction of interest rates, your personal attitude to risk, how affordable your monthly repayments will be, and so on.

If you place a high value on the certainty and security offered by fixed monthly mortgage repayments for a pre-arranged period, then a fix should be right up your street. However, if you think that interest rates are near their peak and will come down over the next year, then a variable-rate deal may be a better bet.

In order to gain some insight into the 'fixed versus tracker' debate, and to see how consumers behave in the real world, The Motley Fool decided to investigate the actions of its own users. Each month, thousands of people apply for home loans via the Fool's award-winning, no-fee, whole-of-market mortgage service.

Therefore, we crunched this data to see what our customers are up to in practice. By analysing thousands of home loans, we discovered that in the first half of this year:

• More than two out of three Fools (68%) took out a fixed rate; and
• Of the remainder (just under a third of the total), 31% took out tracker mortgages, with the remaining 1% taking out other variable-rate home loans, such as discounted variable, capped and low standard variable rates.
• Of the Fools who took out fixed-rate home loans, we found that:
• Over seven in ten (71%) took out a two-year fix;
• Nearly one in five (19%) opted for a five-year fix;
• One in fourteen (7%) went for three years;
• One in fifty (2%) pushed their fix out to a decade; and
• The remaining 1% took out fixed rates lasting for between one and 25 years.

So, if you're one of those people who feel comfortable following the herd, then two- or three-year fixed-rate home loans seem to be the flavour of the day. Then again, if you want to take a gamble that rates will come down again over the coming years, then a cheap tracker mortgage might be preferable. As they say, the choice is yours!

More: Feel free to give our award-winning, no-fee mortgage service a spin!