Get the cheapest mortgage deal

If you want the lowest monthly repayments and you have equity in your property, variable rates still rule.

Fixed rates have long been the darling of UK mortgage borrowers and over half of borrowers choose to lock into their mortgage rate. They offer a level of certainty that is invaluable for many homeowners who need to juggle their household bills and other financial commitments.

But during the last 18 months, fixed rate mortgages have looked pretty expensive, even as the Bank of England began to reduce Base Rate nearly six months ago. Now we are at last seeing lenders drop their fixed rates slowly and steadily, as I recently wrote in Fixed rates fall further.

For those who need peace of mind, fixed rates are now starting to look appealing against their variable rate counterparts. But there is a more important reason that many borrowers are taking them out -- they have no choice.

Variable rates are still few and far between at high loan-to-values (for those borrowing a large proportion of the property's value). But if you have 25% equity, or even 40%, variable rates are still the cheapest deals on the market, with a range of deals under 4%, and even some sub-3% rates.

Cheap as chips

Clearly the most attractive thing about a variable rate is the fact that it is currently very low, and while it remains this low you can benefit from cheap mortgage payments. With this in mind you could even overpay on your mortgage if you have the extra cash.

Variables (which include trackers, discounted rates and standard variable rates) also tend to come with relatively reasonable fees, although they do range considerably. And a huge benefit of variable rates is that many of the deals come free of early repayment charges (ERCs), which means you are not tied into the mortgage.

Lifetime trackers and the standard variable rates (SVRs) of lenders specifically tend to offer this flexibility. This makes these deals an attractive option for those who want to take advantage of low rates now, but would like the freedom to switch to a fix should rates begin to rise. Note that two, three and five year trackers usually do impose ERCs.

Ups and downs

Of course, you are taking a risk with a variable rate. Unlike a fixed rate, your monthly repayments are not guaranteed and if the Bank of England increases Base Rate, your rate will rise by the same amount (if you're on a tracker).

Bear in mind that Base Rate is at a historic low of 0.5%, and doesn't have much further to drop, but it does have plenty of scope to rise. While rates are expected to remain low for the foreseeable future, beyond the end of 2009 is anyone's guess.

But unless the economy remains in the doldrums forever, rates will rise at some point. And with variable rates priced at chunky margin in relation to Base Rate, your costs could rise dramatically.

For example:

 A 3% tracker deal is currently 2.5 percentage points over Base Rate.

Based on a £150,000 25-year repayment mortgage, your monthly repayments will be £711.

If the Base Rate rises to 2.5%, which is still an extremely low level, your pay rate would increase to 5% and your payments would go up to £876 a month.

If Base Rate was increased to 5% (and it was at this level or higher for most of last year) your payrate would be 7.5% and your monthly repayments would shoot up to £1,108 -- an increase of £397 each and every month, or £4,764 a year.

As long as you are aware of this, and can afford a jump in payments, now is still a great time to benefit from the lower rates available. And of course, the ERC-free deals give you the chance to switch to a new deal.

Good alternatives

The good news is, some lenders offer tracker mortgages that allow you to switch to one of their own fixed rates should you decide at any stage you would prefer the safety of a fix. Nationwide and Cheltenham & Gloucester, for example, agree to waive any ERCs on your tracker if you take one of their fixed rate products at any stage.

Plus Woolwich offers a capped rate term tracker deal currently priced at 3.49% (Base Rate plus 2.99%). The deal is guaranteed to stay below 5.99% for the next five years, so if Base Rate goes up to 4% or beyond, your payrate will not track it any further than 5.99%. The deal is available up to 60% LTV and has a fee of £995.

Yorkshire Building Society has today launched a 3.39% two-year tracker rate that is capped at 5.39% (with a 3% collar). It's available up to 75% LTV and comes with a fee of £995.

For those willing to take a chance with a variable rate, some tempting deals abound. Below are some of my favourites:

Sub-3% deals

Sub- 4% deals

Compare mortgages at lovemoney.com

Comments are not gone forever!

We've had to take article comments down temporarily as we set up our new home on lovemoney.com, but new comment tools (and your old comments) will be back soon.