Why the tide has turned for fixed rate loan deals

Considering a fixed rate mortgage? Then think carefully about which deal you go for - and when to take the plunge.

As interest rates have tumbled, so have the fixed rates on offer from lenders. In recent weeks many banks and building societies have unveiled their lowest ever fixes.

But in the past week or so, several leading players have upped the rates on their three- and five-year fixed deals. This is because longer-term "swap rates" - the rates at which mortgage lenders borrow money to finance home loans - have risen.

For example, up until a few days ago Halifax was offering five-year fixed rate mortgages starting at just 3.99%, but now the cheapest five-year deal you can get from them is 4.39%.

Some experts reckon the recent swap rates rise is a bit of a blip. Mike Boles at London-based mortgage broker Savills Private Finance reckons we could see longer-term fixed rates coming back down again in the coming weeks.

The good news is that there are still several lenders offering competitive five-year fixes below 4% - such as Lambeth building society, which has a deal fixed at 3.89% until August 1, 2008. It's available to homebuyers and remortgagers, and there are early redemption penalties during the fixed period but not after. Minimum deposit is 5% (for loans between £237,500 and £300,000 it's 10%, and for loans over that amount you'll need to talk to them) and there are fees to pay.

If you are looking for a two-year fixed rate deal, there's no shortage of attractive offers, says fellow broker London & Country, based in Bath. It highlights a deal launched yesterday by Britannia building society where what you pay is fixed at 3.24% for two years. Britannia will lend up to 95% of the property's value and there are redemption penalties for the two years only, but these redemption fees also apply for capital repayments and transfers to another product. There is a £299 arrangement fee.

Other good two-year rates include Yorkshire building society's 3.29% fixed until September 30, 2005. It's available to home movers and home purchasers, minimum deposit is 5%, there are redemption penalties within the fixed period but not after. There is a £325 fee to pay.

Going back to the five-year fixes, Mr Boles says that if you are in no hurry - for example, if you are looking to remortgage - and you are keen to take a longer-term fixed rate because of the payment certainty it will provide, there is an argument for sitting tight for a few weeks to see if rates come down. Though, of course, you run the risk that they won't.

Fixed rates are proving hugely popular. The average new fixed rate on offer in June was 4.19%, down from 4.63% at the start of the year and 5.15% a year ago. Perhaps not surprisingly, more than half of all mortgages taken out in June were fixes, says industry body the Council of Mortgage Lenders. Some City experts reckon the chances of another interest rate cut this year have receded after it was revealed on Thursday that the warmest June since 1976 helped retail sales grow at their fastest pace for more than a year. Last week, the Bank of England's new governor Mervyn King hinted that this month's cut in interest rates to 3.5% may not be the last in the current cycle.

The millions of people with variable rate mortgages will be hoping Mr King's hint bears fruit.

Mind the gap

It was claimed this week that Lloyds TSB and NatWest are among the institutions making money from "gapping" - passing on interest rate cuts to savers before they reduce rates on mortgages.

Following the latest Bank of England base rate cut, Lloyds TSB reduced many of its savings rates on July 15. But mortgage customers of its Cheltenham & Gloucester arm will not see their home loan rate come down until August 1 - which means 16 days during which Lloyds is charging borrowers the higher rate but paying savers less. Earlier this year it changed its savings rates on February 17, but the mortgage rate didn't change until March 1.

NatWest changed its savings rates on July 17 but again, mortgage-holders will have to wait until August 1. It also "gapped" earlier this year.

It is estimated that for every £1bn an institution holds in savings, a 10-day gap will earn them around £70,000, based on a 0.25% rate cut. Fellow high street giant Halifax says: "Savers who have money with organisations that 'gap' when base rates change are boosting the profits of that bank or society. We think borrowers and savers should see the rates change at the same time."

Lloyds TSB says mortgages and savings are "completely separate" parts of the business and points out it has put up some savings rates.