Although the Bank of England base rate has stayed at the same level for nearly a year, 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. 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.

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.

Article date: July 2006