How to pick the best mortgage

SAYING interest rates are low right now is a touch like saying Stilton tastes cheesy, the Queen's a bit posh, or Jordan and Peter Andre aren't as close as they used to be.

Our half-a-per-cent UK base rate isn't just low - it's 1.5 per cent lower than the previous record low of its entire 300-year history.

That's why every mortgage-holder I bump into seems to ask, "Should I fix while the going's good?"

In other words, is it worth sacrificing a cheaper variable rate NOW to get a fixed rate that'll protect you from possible FUTURE hikes?

There is no definitive answer - but let's run through the logic . . .

FIXES ARE INSURANCE POLICIES

WITH fixes, your rate and repayment are, erm, fixed! So pick 5% for five years, and that's what you pay REGARDLESS of UK interest rate changes or 'owt else.

Unlike variable rates (which include discounts and trackers), it means you know exactly what you'll pay, and it is effectively insurance against interest- rate hikes. Yet, like any policy, it doesn't pay every time.

ARE YOU LOCKED IN?

THE best way to think about time- limited discount, tracker or fixed mortgages is that they're "special offers".

To get these promos, you have to commit for a set period.

If you try to change your mortgage during this time, you'll normally have to pay hefty redemption penalties that outweigh any switch benefits. In which case, it's usually worth waiting until the lock-in period ends before moving.

FIXED RATES CAN RISE

ONCE you commit to a fix, the rate's battened down. Yet those looking for NEW fixes will see prices move - not in line with current Bank of England base rates but with the City's view of where interests rates will go in the long-term.

Right now, new fixes are at their highest for more than six months. So while base rates have stayed under 1%, even top mortgage candidates struggle to bag fixes under 3.75% - and 4.5% to 5.5% is more common. Historically, these are still low, but not unprecedented.

SO SHOULD I FIX?

THIS decision has always been about how important the surety of a guaranteed level of repayment is.

LOW RATE: The Bank of England's UK base rate is 1.5% lower than the previous record low of its 300 year history

The key question is: How close to the financial edge are you? The nearer you are, the more you should hedge towards fixing. Imagine if interest rates rose 4.5 per cent in six months - the same extreme rate by which they fell last year. Could you cope?

Variable rates could be perilous if you can only just afford your mortgage repayments. If you could cope, then getting the very best deal is more important than rate security.

Those who fix for surety should shut their eyes to interest rates afterwards - and remember that you got what you wanted.

IT'S ALL ABOUT WHEN

IN current climes, you must factor in the unprecedented low mortgage rates for existing customers.

For those on higher variable rates who find cheaper fixes, it's an easy decision - after all, with UK rates at 0.5%, they've not got much further to fall so the downside of fixing is small.

Yet for those on cheap trackers or standard variable rates under 4%, say, you've already got a corking deal, and need think very carefully before ditching it.

Even if interest rates do rise, the amount you gain from a fix in the long-term needs balancing against what you lose by ditching your cheap rate right now. For a fix to be cheaper overall isn't just about if rates rise but when and how much.

Imagine you're on a 3% variable but could fix for two years at four per cent. Even if the variable rate rises to 4.5% in a year's time, it will still be cheaper overall to stick with the variable as you will save so much in the meantime.

IT'S A FINE BALANCE

SO, the difficult aim is to reap every penny of gain from your low rate now, while not missing the opportunity to lock-in for three to five years or longer cheaply, in case the predicted rises materialise.

While NO ONE knows what'll happen to interest rates in the short term, many economists believe the Bank of England's statements suggest rates will stay around 0.5% into early 2010.

So, for the next few months there's no urgency for those on cheap deals to ditch and fix - though it's worth being ready to grab any corking long- term deals (for how to spot a deal, see left).

FINDING A DEAL

1. GET a "whole of market" broker. Their job is to find you the best deal and, as acceptance often relies on a credit score these days, good brokers know which deals will fit with your circumstances. "Whole of market" is a regulated term, meaning these specific brokers MUST consider every mortgage available to them to find the best deal. Find a full guide at www.moneysavingexpert.com/findmortgage

2. CHECK direct deals. Some lenders with competitive deals, like HSBC, prevent brokers offering them. So for belt and braces, check these too and if they are any good, discuss them with your broker. There's a free 40-page guide at www.moneysavingexpert.com/remortgageguide

Mortgage application fees can cost thousands, so factor that into your sums. Remember - it's not just about rates.

* TV Money Guru Martin Lewis is the creator of the Consumer Revenge website www.MoneySavingExpert.com which is packed with info on how to get more money in your pocket.

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