Help!

Most people shopping around for a mortgage need to choose between a fixed-rate or a discounted loan.

Sometimes, the decision is relatively easy - if it is clear that rates are set to rise substantially, a fixed rate is more attractive - but with rates static, as they have been for the past eight months, it is harder to predict which offers best value.

The Bank of England kept the base rate at 6 per cent again this month, and mortgage broker Charcol believes the longer interest rates stay at 6 per cent, the greater the chance they have peaked. Charcol marketing manager Siobhan Hotten predicts they will fall towards the end of the year. The broker has just brought out a new two-year fixed-rate mortgage at 5.49 per cent on 75 per cent loan to value in keeping with this prediction. However, rival broker London & Country thinks the base rate will go up by 0.25 per cent before falling away in the first quarter of next year.

If you think rates will soon fall, a discounted mortgage, where the lender charges a set amount below its standard rate, may be tempting. But David Hollingsworth, a mortgage adviser with broker London & Country, says borrowers should think about what they want. If they want the stability of knowing how much they will be paying out each month, they should go for a fixed rate.

If rates drop during the fixed period, you always have the option of switching to a mortgage with a lower rate. But then you may be hit with a redemption penalty.

There are some highly competitive fixed-rate deals on the market. The base rate would have to plummet for them to become bad value. Northern Rock offers a three-year fix at 5.39 per cent, but there is a redemption penalty equivalent to 3 per cent of the loan in the first two years and 2 per cent in the third year.

Discount rate mortgages undercut the lender's standard variable rate, which they track. Hollingsworth says they suit borrowers who can take a rate increase, or who are optimistic. Most discount mortgages have no redemption penalty in the discount period, according to Charcol, so you are free to remortgage. But remortgaging involves costs, typically £800 on a £100,000 mortgage.

Capped-rate mortgages would seem to offer the best of both worlds: security and the potential to pass on a drop in rates. There is no limit to how much the rate can fall but there is a 'cap' on rate rises. However, this type of mortgage tends to be more expensive than the fixed-rate variety. Check out fixed-rate options first.

Some lenders offer a rare hybrid - a mortgage that offers both a capped and a discount rate. But again watch out for penalties. Bristol & West is offering a mortgage capped at 4.99 per cent until 1 November 2001, after which there is a 2 per cent discount for a year.