Personal Finance: Playing Poker With the Market

BORROWERS LOOKING for the best mortgage deal will now be confronted by a bewildering array of options after this week's upward swing on rates.

While the bulk of the industry is expected to peg its mortgages somewhere close to that of the Halifax at around 7 per cent, the Nationwide has already declared that it will not charge borrowers a penny more, giving a pounds 60,000 borrower pounds 18.27 less monthly anguish than Halifax customers.

Even so, the Nationwide is far from the cheapest deal. Direct Line is lending at 6.15 per cent. Standard Life and Egg have also pledged to undercut the rest of the industry.

But the biggest decision borrowers face must be over the certainty of a fixed rate, as a hedge against the Bank of England's monetary policy men going thermonuclear.

Alternatively, should you sign up to one of the new cutely priced discount deals? The choice between these two options is now too close to call.

Earlier this year there were a number of razor-sharp fixed-rate deals as some of the building societies-turned-banks attempted to buy their way back into the mortgage market. But fixed mortgages are not based on current borrowing costs, reflecting future rends. This allows them to chase lower rates down faster, but forces them to digest the prospect of costs climbing that much sooner.

So fixed-rate deals did begin to rise the last time rates were cut. This reflected a view that this was the last trim and rises would follow.

Since then, discounted deals, which can knock up to 2 per cent off the standard variable rate, have looked more attractive. But with variable rates now set to rise, they may look less tempting as cautious borrowers steer towards certainty.

The best time to fix your mortgage is when rates are rising; the problem is that's when they seem least attractive and today's offers look less than glittering compared with what is available elsewhere on the market. However, they may be more competitive than at face value.

The Halifax, for example has a 6.3 per cent five year fix, which rises to 6.75 per cent for borrowers who do not wish to be trapped by early redemption penalties. Similarly the Abbey National has a 6.3 per cent five year deal. Given the variable rates around these scarcely look a steal.

However, when you consider that five-year swap rates, on which fixed mortgages are based, are currently at 6.75, their allure begins to emerge. This means that the Halifax and Abbey National are paying 6.75 per cent for a mortgage which they are lending you at 6.3 per cent. In other words these are loss leaders costing the banks...

But they are only attractive if you agree with money markets that interest rates will average 6.75 per cent over five years. Optimistic market watchers expect rates to rise a little next year before falling back again, which may hand the edge to a discounted deal.

The Abbey National has a two-year discount which promises to peg the loan by up to 2 per cent. Even after this week's hike, discounted borrowers will pay only around 5 per cent initially. It also has a five-year discount, slicing 1.65 per cent off the variable.

Ray Boulger, technical manager at mortgage brokers John Charcol explained: "If you can afford to live with the knowledge that your repayments may go up, then the discounted deals look attractive. But, as rates start to rise, people want to know that they can affordrepayments."

One strategy which combines security with flexibility is to choose a penalty-free fixed mortgage, such as the Halifax's five-year deal. If rates do rise slightly before falling again, you can switch to a cheaper loan. But if we get a nuclear winter on the interest rate front, you can sleep knowing your home is safe.