Keep track of base and cut costs

Although the Bank of England base rate has stayed at the same level for 10 months now, fixed-rate mortgages have been going up in price.

This is a reaction by lenders to a rise in swap rates (the rates at which City institutions lend money between themselves) in anticipation of a base rate rise later this year. Some lenders have factored in more than a quarter of a percentage point rise in their fixed rates.

As a result, tracker mortgages, whose rates have stayed static, have started to look more tempting for those looking for a cheap deal. Now, even if the predicted base rate rise happens, borrowers on the cheapest trackers could absorb it and still be paying less than they would on the cheapest fixed rate.

'Base-rate tracker mortgages are starting to look highly attractive and are preferable to discounted rates,' says Melanie Bien at brokers Savills Private Finance. Discounted rate mortgages offer a discount on the lender's standard variable rate, so - unlike with trackers - the lender is under no obligation to pass on reductions in the base rate if it chooses not to.

'But although rates are good value at the moment compared to fixes, those borrowers who require the certainty of set monthly mortgage repayments should stick with a fixed-rate deal,' she adds. 'Tracker rates can go up as well as down, in line with movements in the base rate, so you must be able to afford your mortgage if the payments do increase.'

James Cotton, mortgage specialist at brokers London and Country, agrees: 'There are some people who are fixed-rate "types", either because they are cautious or have a very tight budget and therefore need the certainty of set monthly repayments. These people should still be looking at fixed-rate deals.'

However, for those who have made up their minds about trackers and want a short-term deal, Direct Line is expected to launch what looks to be the cheapest deal on the market on Thursday. It is a two-year tracker and available via the internet only, with an interest rate of 4.19 per cent. Direct Line charges interest daily rather than annually, which is cheaper for borrowers, and the loan comes with a £599 fee but no legal or valuation fees for those remortgaging.

Another good deal comes from the Lambeth building society, whose tracker is currently priced at 4.25 per cent with a £440 fee. The Lambeth deal is only available on a maximum 80 per cent loan-to-value basis, however, and the building society charges interest annually, not daily, which makes it more expensive.

The best two-year fix, on the other hand, comes from the Portman building society at 4.59 per cent with a £599 fee. So borrowers on either of the above tracker deals could still be paying less than this even if the base rate goes up by a quarter of a point.

For those looking to remortgage, Nick Gardner of mortgage broker Chase de Vere points to the Nationwide's two-year deal, which tracks at 0.13 per cent under the base rate. 'With no legal or valuation fees, this compares favourably to the lower rates on the Lambeth,' he says.

Gardner suggests those unsure about trackers might want to look for a deal which offers the flexibility to switch products. 'Portman has just launched a "drop-lock" option on its two-year tracker at 4.29 per cent. This means borrowers can switch to one of its fixed rates, without penalty, at any time, giving them peace of mind,' he says.

For those looking for a lifetime tracker he points to a deal from the Hinckley and Rugby building society launched last week. Its has a rate of 4.65 per cent with no early redemption charges. This means borrowers can switch to any other deal, from whichever lender they wish, at any time without penalty.

'Lifetime trackers are particularly good if you've got a small loan, perhaps under £75,000, or you have a loan with less than 10 years to run. The fees associated with remortgaging can have a big impact in these cases and a lifetime tracker avoids those,' says Cotton.

He recommends the Woolwich tracker, which currently has a rate of 4.79 per cent, no arrangement fee and free valuation and legal work for those remortgaging. The rate goes up to a less competitive 4.99 per cent on loans over £100,000.

For those worried that repayments with a tracker could rise beyond their budget, Cotton points to capped tracker deals as an option. With capped mortgages, the rate falls and rises in line with the base rate but will not rise above a certain level. London and Country is offering an exclusive two-year capped tracker deal with the Clydesdale. It tracks at 0.49 per cent above base rate and is capped at 4.99 per cent. It comes with a fee of £425, free legal and valuation work for remortgages and there are no early repayment charges.