Getting a fix on interest rates

The price of fixed-rate mortgages tumbled this week following a surprise fall in the inflation figures. The "best-buy" two-year fixes, dropped this week to just 4.59% at West Bromwich building society and 4.69% at Yorkshire building society. This compares with the 5% level for the best two-year fixes just a couple of weeks ago, and the 5.5%-5.8% rates earlier in the year when it was widely anticipated interest rates were on the rise.

This week the inflation figure fell to its lowest level in the post-war period, helped by the biggest drop in clothing and footwear prices since 1947. The rate dropped by 0.3% to just 1.5%. The fall, much heavier than expected, prompted a swift reaction in the City's money markets. Before the announcement, markets were pencilling in a rise in the Bank of England base interest rate, currently 4%, to as high as 5% by the year end. Now they are forecasting a rise to no more than 4.5% by the year end, with many experts predicting no rise at all.

"The inflation figures make the prospect that interest rates are likely to rise soon look increasingly remote. Also, the housing market is showing signs of a slowdown, which takes away the urgency of a base rate increase.

"Added to this, the well-documented falls in the FTSE have wiped billions of pounds off the value of the stock market," says David Bit ner, director of the MarketPlace at Bradford & Bingley.

Mark Harris of mortgage broker Savills Private Finance said: "Over the past eight weeks we have seen the price of two-year money fall by 0.4%, while for five-year money it is down by around 0.25%. That's allowed lenders such as Yorkshire to slice their fixed rates to just 4.69%."

However, borrowers hoping for such a rate must have at least 25% equity in their property. Someone with the minimum 10% deposit will be offered a rate of 4.84% instead. But even though the price of fixed-rate mortgages is falling, most new borrowers are opting for discount mortgages, says Mr Harris.

"If you need to know where you stand, or if you are really stretched on your mortgage, you should fix. But people who can afford to take some risk of movements in interest rates should be looking at discount mortgages," he says.

The best are currently on offer from Bank of Ireland and Bristol & West, both part of the same group. The mortgage has an initial pay rate of 3.79%, equal to a discount of 2.16% off the standard variable rate for the first two years. There are no lock-in penalties after the discount period expires in September 2004, but there is an arrangement fee of £299.

At mortgage brokers Charcol, Ray Boulger says: "People with heavy monthly income commitments should still look at fixed or capped rates. But for people without too many commitments I would recommend a discount or tracker mortgage. They are likely to deliver better value over the next two to three years.

"The proportion of fixed rate mortgages actually being taken out has been steadily declining. The Council of Mortgage Lenders' figures show them going down for the last four years.

"That has to be because people are more confident that interest rates are likely to stay low. It is not like 10 years ago when they could rise by a few points over a very short space of time."

He recommends Britannic Money's two-year discounted mortgage, which has a current pay rate of 3.99%, a discount of 1.9% on its standard variable rate of £199. It is available for borrowers with deposits as little as 5% and has a £199 arrangement fee.

In the longer term, though, rates are still predicted to rise. Halifax chief economist Martin Ellis says: "We had been expecting two base rate rises to 4.5%, but now thinks there will be only one of 0.25%, probably in November. We still expect base rates to be at 5.5% by the end of next year."