Falling fixed mortgage rates just an illusion

Some lenders have trimmed their mortgage rates in recent weeks, but don't get too excited...

UK borrowers love a good fixed rate.

Even when they are 'out of favour' they still account for around half of all mortgages, and when they are priced well this can shoot up to 80% of the market or more. Broker John Charcol saw a record number of borrowers lock in to a fixed rate deal in June for example - a whopping 83%.

We like the safety they offer and the peace of mind of knowing that we can budget effectively during our fixed rate period without having to keep one eye on the Bank of England's Base Rate.

Fixes were priced pretty well in the Spring in relation to other types of mortgages (variables and trackers) but that all changed in June when they were increased by lenders across the board. These rising rates were significant and well publicised, but in the last few weeks there have been a handful of lenders actually decreasing their fixed rates.

So what's going on?

The tiniest drop

It's true that following a month of rising fixed rates July has seen a small number of lenders dropping their fixed rate mortgages again.

But when you dig a bit deeper the cuts are neither significant nor widespread.

Nationwide recently cut its two and three-year fixed rates for existing customers by up to 0.99% - a large decrease but only available to its current mortgagors.

Woolwich, Lloyds TSB, Cheltenham & Gloucester, Halifax and Britannia all announced reductions to their fixed rate mortgages in the last few weeks, but they were by minimal amounts of between 0.1% and 0.3%, and in general not on the lenders' full fixed rate mortgage ranges.

The fact is that most lenders haven't significantly changed fixed rates in the last few weeks and any reductions should be taken with a pinch of salt.

Plus they follow big increases - fixed rates are still more expensive now than they were at the start of June.

Because of this an increasing number of borrowers are now turning towards keenly priced tracker deals, figuring that the Bank of England Base Rate would have to increase a lot before they rise above current fixed rates.

Some trackers were reduced in June and they are currently looking very competitive - typically 2% lower than five-year fixed rates, which is a huge amount.

Last of the long-term fixed rates?

Another noticeable development in the fixed rate mortgage market is the rise and fall of the super-long-term fixed rates - in other words deals that are fixed for 25 years or more, giving you the ultimate payment security.

The number of lenders offering these deals peaked at eight in January 2008, but by January this year only three lenders remained in the market - Manchester Building Society, Scarborough Building Society and The Cooperative Bank. Now they've disappeared completely leaving no 25-year fixed rate deals available. Britannia Building Society still offers a 15-year fixed rate at 6.49% and just nine lenders offer 10-year fixed rates.

So while 2009 has seen a dramatic increase in the popularity of medium-term fixed rates, such as five-year deals, borrowers are unwilling to lock in for longer and lenders cannot offer attractive rates over these time periods.

Where next for rates?

That's the million dollar question as it now looks as though the Base Rate could stay low for some time - at least one year and many predict two. Of course, the speed of the global economic recovery and UK inflation will have a huge impact on how rates move and, frankly, both are unpredictable.

As of today though, fixed rates certainly do look expensive compared to both lenders' borrowing costs and to variable rate mortgages. However, they still offer borrowers a payment guarantee at a time when many are worried about job security and potential rate increases.

The old advice still stands - if a fixed rate is affordable, you want the payment security and you can't afford for a rise in your mortgage pay rate over the next few years, they are a good option. And below are some of the best about.

Six sensational fixed rates

There is a wide choice of fixed rates on the market, depending on your choice of duration, the upfront fee you are willing to pay and the level of your deposit. Below are six of my favourites:

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