Should you fix your mortgage rate?

A plus point of the recession has been the low interest rates homeowners have enjoyed for the past few years. And while it seemed inevitable that rates would rise as the economy began its slow recovery process, an injection of cash courtesy of the Bank of England's Funding For Lending scheme, aimed at pushing banks and building societies to lend to homeowners and businesses, means new low-rate deals can be had once again.

should you fix your mortgage rate
should you fix your mortgage rate

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Tesco Bank recently launched a record low 1.99 per cent two-year fixed rate, and other lenders are being forced to slash their rates as a bidding war erupts.

So should you take advantage of these new fixed-rate deals, and what are the alternatives?

Why choose a fixed rate mortgage?
Who wouldn't be tempted by a 1.99 per cent fixed rate? Just be aware that such low rates can come at a cost. To get the best deals, you'll need a hefty deposit, and remortgaging fees can prove expensive.

Tesco's two-year fix at 1.99 per cent, for example, is only available to those with a sizeable 40 per cent deposit - and there's a charge of £995 for anyone taking the supermarket up on its offer. Even longer-term fixed rates are also available - Chelsea Building Society recently launched a five-year fixed rate mortgage at 2.99 per cent. But again, a 30 per cent deposit is needed and the deal comes with a £1,495 fee.

Other lenders are offering deals just above three per cent for borrowers with a 25 per cent deposit - and if you have the lump sum available and a large mortgage to pay, then it could well be worth seeking out one of these new deals, where you will typically be paying a lot less than on a standard variable rate. Just be careful to check extra costs such as fees when doing your price comparison, and be aware that rates could well be on the rise just as you come out of a two-year-fixed rate deal.

Some lenders are also offering five-year fixed rates to those with smaller deposits, giving hope to first-time buyers. The Co-op, for example, now has a five-year fixed rate at 3.99 per cent if you have a 15 per cent deposit and £999 for the fee, while others are offering five-year fixed rate mortgages to those with just a 10 per cent deposit, though you are likely to be faced with a rate just under five per cent.

It's also worth bearing in mind that you will be charged if you switch mortgages during the fixed-rate period, and if you plan to move during that time, do check that you can take your mortgage with you.

What are the alternatives?
Generally speaking, the standard variable rate (SVR) is going to be the most expensive, which is why so many who bought a home prior to the recession struggled to keep up with repayments when their original fixed rate ended.

Since lenders can legitimately raise their SVR at any time, a better option may be a tracker mortgage. With a tracker, the interest rate you pay is fixed at a set margin above the Bank of England base rate, which means as long as that stays low, you'll be taking full advantage.

Many firms offer lifetime or long-term trackers and there are plenty of fee-free options available. Once again, those with a hefty deposit will get the best deals (such as HSBC's lifetime tracker at 2.64 per cent with a £999 fee if you have a 40 per cent deposit), but rates of 4.19 per cent or 4.79 per cent are also out there for those with a 15 or ten per cent deposit respectively. If you are hoping to avoid the fees, you will likely pay a higher rate, but it does offer first-time buyers the chance to avoid the often expensive SVR.

Tracker mortgages aren't without their disadvantages either, however. Should the base rate suddenly jump up, so too will your repayments, and this means they may not be ideal for those on a tight budget who need to know exactly what's coming in and going out of their bank account each month.

As always, it is worth checking the small print - some lenders will charge if you overpay on a tracker mortgage and it's possible you will be liable to an early repayment fee should you switch.

Whatever you choose to do, there are offers out there that could well save you money - just be sure to check all the finer details or speak to an independent mortgage adviser to make sure you get a deal to suit your individual circumstances.

* Rates quoted are correct at time of writing and may change. Visit a mortgage comparison site for the best deals.

Have you taken advantage of a fixed rate or risked a tracker mortgage? Leave your comments below...