Fix your mortgage at 3.59% for 4 years!

Donna Ferguson rounds up the latest fantastic fixed rate mortgages available.

If you’re a regular reader of lovemoney.com, you’ll know that the mortgage rates on new deals are currently the lowest they’ve been since records began 23 years ago.

So how does your current mortgage compare to the new rates on offer?

According to Moneyfacts, here are the average rates available for the various types of mortgage right now: 

Source: Moneyfacts 

Let me guess. Some of you have read this and thought: Ha! The rates on these new deals are not as low as the rate that I am currently enjoying at 1% (or less!) above the Base Rate.

This is because, back when the banks offered you and many other borrowers such trackers at such close proximity to the Base Rate, they arrogantly assumed the Base Rate would never drop to its current record low of 0.5%. More fool them, eh?

So, if you’re on a super-low tracker, congratulations - you obviously had the foresight and intelligence to accurately predict the credit crunch, recession and all our current economic woes. Either that you’ve had extremely good luck.

Unfortunately for the rest of us, this unusual coincidence of events - new mortgage deals which closely track the Base Rate, immediately followed by a record fall in the Base Rate - is unlikely to happen again in the near future. In fact, it would be impossible, as the Base Rate is already so low. And banks don’t tend to make the same stupid mistakes twice in a short space of time. (Different stupid mistakes, certainly.)

I’m not saying that, nowadays, the tracker rates on offer aren’t extremely low. They are. But only because the Base Rate is extremely low. Once the Base Rate rises to an historically more ‘normal’ level of say, 5% or 6%, the trackers on offer today will look very expensive indeed, especially by modern standards. And anyone who took one of them out will be left reeling in payment shock.

That’s one of the reasons why, here at lovemoney.com, we think taking out a two-year or a three-year tracker would be a bad move right now - even though the rates on these trackers are around one percentage point cheaper than the fixed rates on offer.

After all, no one can say exactly when the Base Rate will start to rise, only that it will, definitely, start to rise at some point. Probably fairly soon. In this context, it seems to me that - despite any tempting short term savings you may make over the next few months - locking yourself into a variable deal that will inevitably get more expensive is a very silly idea indeed.

Are you feeling clever?

On the other hand, you might think taking out on a lifetime tracker deal (which doesn’t have any early repayment penalties) or staying on a competitive SVR (the Standard Variable Rate you moved onto when your previous deal ended) would not be such a bad idea. Since these mortgages are flexible and you can remortgage at any time without penalty, you can wait, paying your low variable rate, until the first rate rise takes place. And then immediately remortgage to a cheap fixed rate.

[SPOTLIGHT]Very clever.

But unfortunately, this is a risky strategy. Remember how earlier I said banks don’t make the same stupid mistakes twice? As soon as the base rate rises - I mean, literally, on the day it happens - you can bet your bottom dollar, pound, yen, euro and shekel that all the mortgage lenders will rush to withdraw their cheap, low fixed rate deals and replace them with much more expensive fixed rates.

They won’t want to be caught out with fixed rates the way they have been with tracker rates, where thousands of their customers are smugly sitting pretty on ridiculously low rates, paying way below the market average.

On this day, the day of the first rate rise, I predict that most people seeking to remortgage will be forced to swallow the difference between the cheap fixed rate they could have had the day before, and the new, more expensive fixed rate that is now available to them. This difference is very likely to be hundreds and hundreds of pounds a year, if not a month. That will be the price of the very-clever, ‘wait-and-see’ approach.

The alternative, of course, is to commit to a fixed rate now. To take a deep breath, think realistically about the future and exchange that super-low tracker for a cheap fixed rate. Because fixed rates really are shockingly cheap right now. They are so low that fellow lovemoney.com writer John Fitzsimons and I regularly shake our heads at each other in amazement when we see new ones being announced in press releases. We’ve both been closely following the mortgage market for years and we genuinely have never seen anything like it.

As well as paying this low rate, you’ll get the security of knowing your mortgage payments will not rise during the fixed rate period, and you can budget far into the future, knowing exactly what your mortgage payments will be every month.

How long should I fix my mortgage for?

For me, the key question is no longer:

• Should I get a tracker or a fixed rate? 

It’s:

• How long should I fix for?

Because the longer you can fix for, the better -  ideally, you want to fix for five to ten years. Not only will you get to benefit from the current super-cheap rates for longer, you will also save on the fees involved with remortgaging every few years as well.

The downside of fixing for so long, of course, is the commitment required. Once you’ve got a fixed rate, you can’t remortgage for years without paying huge penalties, known as ERCs. These can be much as 7% of the outstanding balance (so £7,000 for every £100,000 you’ve borrowed) during the first two or three years, decreasing to 1% by year 10.

This commitment can and does put many of borrowers off, especially those of you with young children or anyone wanting to start a family. What if, in three or four years’ time, you want to move to a bigger house or buy a more expensive property to be near a better school? While most mortgages nowadays are portable, if you need to borrow more money to buy your new property, it can be difficult or expensive to do so while tied into a fixed rate.

But don't despair: three- and four-year fixed rates do exist! They are just not as popular as two and five year fixed rates so there are fewer of them. However, they are still very cheap, and the ERCs are lower, typically around 4%. This makes them more flexible than longer-term fixed rates, while still saving you the some of the costs of remortgaging frequently.

Top fixed rates available now

Here’s a round-up of the best three- and four-year fixed rate mortgages available right now - I like the four-year fixed rate from Abbey for Intermediaries, which allows to fix your mortgage at just 3.59% until October 2015. Just be aware only mortgage brokers have access to this deal - it's not available on the high street.

Source: lovemoney.com mortgage centre 

Please note that many of these deals have large product fees so it’s worth figuring out the total cost of the deal over the fixed term to ensure it works out the cheapest for you.

More: The most expensive homes on the market | Average mortgage fee is more than £1,000!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

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

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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