Cheaper Fixed-Rate Mortgages!

Although rates are going up on tracker mortgages, some fixed-rate home loans are getting cheaper. We track down some great rates.

Last week, in More Mortgage Rates Increase, I warned that, thanks to worldwide banking turmoil, the cost of variable-rate tracker mortgages has been rising this month. Indeed, in just a few days, five lenders raised their yearly interest rates on these home loans by between 0.1% and 0.35%.

The reason why variable-rate mortgages have been getting dearer is that these loans are linked to the cost of inter-bank lending on the wholesale money markets. It is not clear which banks are the most creditworthy, as some will have large, but as yet unquantifiable, exposure to dodgy subprime mortgage lending in the US. Hence, the ongoing `credit crunch' has made banks fearful of lending to other banks.

Thus, the normally huge, highly liquid market for inter-banking lending has all but dried up, at least for now. The upshot of this is that the London Interbank Offered Rate (LIBOR) for three-month lending in sterling, previously under 6% a year, climbed to almost 7%. This is its highest level in nearly a decade. At present, three-month LIBOR has dropped back to around 6.4%, still about 0.5% higher than it was two months ago.

On the other hand, there is some good news for homeowners and homebuyers looking to take out fixed-rate mortgages. Over the past month, a number of lenders have cut interest rates on fixed-rate home loans. This is because the cost of these loans is closely linked to the Bank of England base rate, which currently stands at 5.75% a year.

As the money markets are indicating that the base rate has peaked and may come down over the next year or two, long-term swap rates are coming down. This makes fixed-rate borrowing cheaper, which explains why interest rates on two- to five-year fixed-rate home loans are now easing downwards. In recent weeks, leading lenders (including Britannia BS, Nationwide BS, and, last week, Woolwich) have all trimmed their fixed rates. However, fixed rates still look expensive compared to trackers, especially if the base rate does indeed come down over the next twelve to eighteen months.

Hence, if you prefer the security of knowing exactly how much your monthly mortgage repayments will be for years to come, then a fixed-rate deal is probably your best option. However, if you're of the view that the base rate has peaked and will start to drop in 2008, then a tracker mortgage may be a better option.

Anyway, let's see how attractive the best fixed-rate deals are, using The Fool's award-winning, no-fee mortgage service, which searches the whole of the market to find you the best home loans. Here is a selection of top home loans:

Fixed-rate mortgages with no extended early repayment charge (ERC)

As you can see, if you can stump up a 20% deposit, then you can fix for the next decade with Woolwich at 5.59% a year, with a £995 arrangement fee. Furthermore, you can forget interest-rate variations forever if you sign up for the thirty-year fix at 5.99% from Fool partner London & Country. Although this mortgage charges a 2% arrangement fee, there are no exit penalties, so you can get out at any time if rates move against you.

Finally, before you rush off to grab that mouth-wateringly low fixed rate, be sure to look into the small print. One reason why fixed-rate loans look relatively cheap at the moment is that all decent-looking deals come with hefty arrangement fees attached. What's more, adding a £1,000 fee to your mortgage and repaying it over 25 years could cost you a total of £2,000 to £3,000, depending on future interest rates. So, be sure to check all the fees and charges before signing on the dotted line!

More: Try our mortgage service to find a happier home loan | Beware 125% Mortgages | Is Your Mortgage About To Give You A Shock?