Deal that's no longer a quick fix

There's a nasty shock awaiting householders who took advantage of super-low fixed rate mortgages in 2003. The deals are coming to an end, and monthly mortgage payments are set to soar.

It is estimated that as many as 450,000 homeown­ers are on two-year fixes which will run out over the next few months.

Back in the spring of 2003, the Bank of England base rate fell to a low of 3.5%, prompting a flood of cheap fixed rates. Britannia building society, for example, issued a two-year fix at 3.24%.

But today, with Bank of England base rate at 4.75%, and standard variable rates in the 6.25%-6.75% range, the end of the fixed period will see payments jump.

A £100,000 two-year fix from Britannia in 2003 cost £487 per month. On expiry, the mortgage payment shoots up to £666 per month - an extra £179.

So what should householders coming off fixes do now? Britain's most respected mortgage commentator, Ray Boulger at broker Charcol, believes that householders may be better switching to a tracker or discount mortgage rather than another fix.

Most two-year fixes are now in the 4.75%-5.25% range and come with quite hefty arrangement fees. He says: "I would go for a tracker or discount. Personally, I think base rates are not going to rise by more than another 0.25% but the price of fixed-rate mortgages are reflecting an anticipation that rates will go up further."

The best discount rate is with the tiny Barnsley building society, although as it's an "intermediary only" product not available directly at the branches, it doesn't appear in Jobs & Money's Best Buy tables. It offers a 2.29% discount over two years, giving an initial pay rate of 4.45%.

The best directly-available loan is the Portman's 2.26% discount over two years, which gives an initial pay rate of 4.48%, although it has a £499 arrangement fee. See our Best Buy tables on page 21 for further details.

But if you do want a fixed-rate mortgage - and they are a sensible choice for people with large loans who cannot take the risk of rising rates - the best on offer are 4.68% two-year deals at Derbyshire and Portman building societies. Longer term, five-year fixed rates are available just below 5% (Britannia at 4.94%, Cheshire 4.98%). None has a penalty tie-in beyond the term of the deal.

David Hollingworth from brokers London & Country Mortgages points out that two-year fixes have fallen back from their highest level - last summer the best rate we could find was 5.24%. "This illustrates how volatile fixed rates can be. But it seems to have calmed down as market sentiment has improved and, in fact, the Derbyshire rate was only introduced in the last couple of weeks."

If your loan is small, keep an eye on fees. Kent Reliance offers a two-year discount at 4.55% with free legal work for remortgages. The Stroud & Swindon offers a two-year fix at 4.85% with free valuation and legals.

Case study - savings offset the rising rate

Surveyor Alistair Beard, 41, fixed his £116,000 mortgage at 4.39%, but the two-year deal ends next month. If he does nothing, his payments will jump as he is switched on to the 6.79% standard variable rate at his lender, NatWest.

He could opt for the 4.48% discount rate at Portman building society, or the 4.68% two-year fixed deals at Derbyshire and Portman.

However, he's unlikely to choose either as, since he first took out the mortgage, he's built up a fair chunk of savings. Can he use them to offset the cost of the loan, but still have access to the cash if necessary? And can he also fix the rate for another two years?

Jonathan Cornell at Hamptons Mortgages recommends the 5.19% fixed offset deal from Clydesdale Bank. "It's an excellent rate and comes with free conveyancing and free revaluation for mortgages."

Mr Beard's savings will be offset against the mortgage balance, yet he will be able to withdraw them at any time.

He also wants to let the property in future and buy another. Would that be an issue?

Most lenders demand an extra 0.5%-1% if a house is subsequently tenanted, but this is frequently waived after a little negotiation.