Variable or fixed-rate loan

Borrowers looking for a new mortgage may be better off going for a variable-rate or tracker-style loan rather than a fixed-rate deal, despite the record 0.5 per cent low in Bank of England interest costs.

What’s the cost? Fixed rates cost four per cent or more, while best-buy variable rates, for example from HSBC, start at about two per cent. So, in this case, mortgage rates would have to rise by more than two percentage points before variable-rate borrowers were worse off.

The timing and size of future interest rate increases are crucial to which loan type proves cheaper. When rates do rise again, the increases could be quick and sizeable, say experts. However, worries about a slow recovery mean interest rates could remain low for at least two or three years, says John Charcol mortgage brokers.

Discount or tracker? Tracker mortgages - which follow moves in base rate - made sense when rates were falling as rate cuts were generally passed on in full. But with the only way for rates being up, some brokers think deals based on standard variable rates (SVR) could be preferable. With these discounted and SVR rates, lenders may temper their rate hikes.

However, borrowers choosing any kind of variable rate mortgage should be sure they could afford possible increases in monthly payments. Otherwise, the certainty of a fixed rate may still be worth paying for.