When you should not get a fixed mortgage deal

Fixing your mortgage for the long term is widely seen as the smartest move in the current climate, but it's not right - or even possible - for everybody.

Regular readers (and watchers of our brand new videos) will know I'm a big fan of five-year fixed rate mortgages.

If I was on a variable mortgage right now, or even just the lender's Standard Variable Rate, I'd waste no time in sacrificing the mega-low repayments I was enjoying in the short-term for the security of an affordable five-year fixed mortgage deal. Makes perfect sense.

But not for absolutely everyone. The truth is, despite the financial media's obsession with five-year fixed rates at the moment, there are some circumstances where it's not the right move - or even possible - to get one of these fantastic deals.

The mega-low tracker

It sounds like the stuff of legend now, but the mega-low lifetime tracker mortgage did exist not that long ago. Just a couple of years ago, you could get a deal of just a few basis points above Bank Base Rate. Woolwich, for example, offered a lifetime tracker at 0.18% above the base rate - and you only needed a 20% deposit to qualify for it.

This was before, of course, the credit crunch began... and the cock-ups that followed. But that's another story.

But if you took out one of these pre-credit crunch trackers, and it lasts for the lifetime of your mortgage, you should be counting your lucky stars. Because not only do you have crazily low repayments at the moment, but you'll also probably have a pretty competitive rate in the future - even when rates do start going up (as they inevitably will).

Let's take two people with tracker mortgages, Jack and Jill, who both have the same salary. Jack recently took out a three-year tracker at Bank Base Rate + 2.5%, while Jill nabbed a lifetime tracker a few years ago, at Bank Base Rate + 0.25%. Both are mortgages for £150,000.

Both are having a great time of it right now. Jack's current monthly bill is £711, while Jill is laughing with a bill of just £545 a month.

Now, let's say the economy takes a dramatic upturn, and Bank Base Rate starts moving up pretty regularly in 0.5% incrementals over the next couple of years. By the time Bank Base Rate hits 5%, which is the level it was at just last year, Jack's mortgage rate will be a relatively high 7.5% a year. His monthly payments will have leapt from £711 a month to around £1,200 - an increase of £505 a month.

Jill's mortgage rate, on the other hand, is still pretty good, at just 5.25%. She's still only paying what someone who took out a decent five-year fixed rate would pay today - around 5% to 5.5%. And while her repayments have also risen by nearly £500 a month, her monthly payments are more afforable on her salary than John's are, at just over £1,000 a month.

Of course, this is only one scenario. It's difficult to predict just how much Jack's decision to take out a three-year tracker instead of a five-year fixed rate will leave him out of pocket. It all depends on how quickly the base rate rises over the next three years.

But if the rises begin soon or happen quickly, it may well be the case that Jack ends up rueing the day he opted for a short-term tracker over a long term fixed rate.

What about Jill? Her rates have gone up too, but that's unavoidable. In any scenario that I can see (bar a sudden, unprecendented jump in interest rates to 7%), Jill is wise to hang on to her extremely low lifetime tracker.

After all, with a lifetime tracker, you are usually free to remortgage at any time. So you can look around the market and pick your moment to fix your mortgage, should you choose to.

If, on the other hand, you take out the lowest tracker you can find right now, you'll almost certainly be tied into this deal with early repayment charges (ERCs). This means there will be penalties to pay - often thousands and thousands of pounds - if you want to remortgage at any point during the next few years.

When fixing is impossible

And that's the problem for many borrowers on trackers. It's very easy for me to say that if you have a less attractive tracker (a couple of percent above Bank Base Rate for example), you need to fix your mortgage and do it now. The trouble is, if you are tied into a deal with ERCs, you simply may not be able to afford to.

After all, it's one thing to put up with higher monthly payments in order to secure an affordable deal for the next five years, but if you are going to have to hand over a couple of thousand pounds upfront for the privilege, it doesn't look so attractive any more.

You will have to do your own sums to work out if it makes sense for you to pay your penalties to get out of your deal now and get a fix instead (read Should you ditch that fixed rate mortgage? to find out how).

If it's not the right move for you, then you would be wise to at least take advantage of your mega-low mortgage repayments by overpaying and building up your equity.

The negative equity club

That brings me to the other bunch who are unable to change their mortgage - those in negative equity.

First, I want to emphasise that negative equity is not the end of the world. And you might like to read Don't be panicked by negative equity!

However, it does trap you when it comes to your mortgage. The fact is, if you are in negative equity, and have a tracker mortgage, you have absolutely no chance of remortgaging at the moment. No one wants to lend to you, because you're too high risk.

So should Base Rate start to move upwards, you have no choice but to take it, which is far from ideal.

As with those facing large repayment charges, my advice would be to ensure you overpay as much as possible while your repayments are low to try to make up that shortfall, as well as consider ways to improve the value of your property, such as an extension or even a simple redecoration.

Overall, I still think that if possible, now is the time to go for a long-term fixed rate for most people. Certainly, if you're considering either going for a tracker or a fix, a fix is your best option.

But there remains a select band of borrowers for whom such a move may not be the best option, or even an option at all.

If you're unsure which category you fall into, I'd recommend you speak to one of our award-winning brokers and get professional advice. They should be able to give you peace of mind that you're not only doing the right thing, you're also doing it at the right time.

More: Goodbye, cheap fixed rate mortgages | The virtues of variable rate mortgages