To fix or not to fix

Variable rate mortgages might look extremely attractive while the base rate remains low, however Cathy Neal, Senior Researcher for Which? Money (www.which.co.uk/money) tells us why it is best to go fixed

Whether to go for a fixed or variable rate is one of the most difficult decisions you have to make when choosing a mortgage.

As a first time buyer, it's likely you'll be on a budget so you don't want to end up paying over the odds, but to make this decision you need to be able to predict what will happen to interest rates - a tall order, even for the experts.

With a fixed rate, which more than half of borrowers choose, you can be sure how much you will have to pay for the duration of your initial deal (usually two to five years), but if the Bank of England base rate goes down, you won't benefit.

On the other hand, if you take out a variable rate, which could include a discounted or tracker deal, your rate will go down with the base rate but also up, which could leave you struggling with a higher payment than you can afford.

The fixed rate has generally been the mortgage of choice for first time buyers but with the huge base rate cuts we've had recently - from 5% in April 2008 to just 0.5% in March 2009 - you may, understandably, be tempted by a tracker or other variable rate.

At the beginning of 2008 you could have taken out a tracker mortgage for 95% of the property's value at base rate minus 0.17% until the end of 2009. If you had borrowed £100,000 on a repayment basis you would have gone from paying £604 at the start to just £369 by February 2009.

But what could you get now? There are no 95% trackers anymore, but you could get an 85% deal from Shepshed Building Society (with a hefty arrangement fee of £999) at base rate plus 3.49% for two years.

With a £100,000 mortgage you would be paying £555 a month with the base rate at 1% but if it went back up to its April 2008 level of 5% your payments would leap to £805.
You could be facing a huge jump with any variable deal you take out now, so a fixed rate is still the sensible option in these uncertain times.