Mortgages: Now's the time to get in a fix

More than half of borrowers are choosing a two-year fixed-rate mortgage, according to the latest lending survey by brokers Hampton International Mortgages. In February, 51 per cent of borrowers chose a two-year fix, against 39 per cent in January and just under 25 per cent a year ago.

The trend reflects intense competition for new business; brokers say several lenders are offering attractive rates to bolster their lending figures in the last quarter of the financial year.

Lower money-market rates are also letting banks and building societies offer better deals on fixed-rate mortgages. Jonathan Cornell, director of Hampton International Mortgages, says that with Bank of England base rates on hold at 4.5 per cent, short-term fixed rates look attractive.

Typical two-year fixed rates include 4.30 per cent with Portman Building Society, 4.39 per cent with Alliance & Leicester and 4.44 per cent with the Nationwide. Portman has a 3.99 per cent rate but this has an arrangement fee of 1.25 per cent of the mortgage. Anyone borrowing £40,000 or more would pay a higher arrangement fee than the £499 charged for the Portman's 4.30 per cent deal.

Other small print makes it hard to pick the best deal from the range of two-year fixed-rate mortgages on offer. Some deals are only on offer to borrowers who are remortgaging: Portman, for example, has a two-year fixed rate at 4.39 per cent with a free valuation and free legal fees, but this is a remortgage-only deal. Nationwide's two-year fixed-rate deal has a £599 fee for home buyers, and a £698 fee for remortgages, although this does include the valuation and legal fees.

Mark Chiltern, managing director of brokers Purely Mortgages, says two-year fixed rates are now the main home-loan. "It has almost become a habit for people who have had a deal for two years to take another two-year loan," he says.

But competition has not brought transparency on the real costs of a mortgage. Both initial "booking" fees and exit fees, payable when the mortgage is paid off or switched, are on the rise. Some lenders have moved from fixed arrangement fees to ones based on a percentage of value, making like-for-like comparisons hard.

"With a flat sum arrangement fee, there is at least an arbitrage opportunity," Chiltern says: home buyers can trade a higher fee against a lower interest rate. The larger the mortgage, the greater the saving from a lower interest rate.

"We tell clients to pay the arrangement fee rather than add it to the mortgage, and each month put aside some of the money they save from the mortgage to saving that fee. At the end of two years, you know exactly what you have saved."

A further complication is how the mortgage interest is calculated and whether there are other restrictions or benefits attached to it. Fixed-rate mortgages have early redemption penalties attached, but their level varies from lender to lender - they can be as high as nine months' interest.

Most fixed-rate mortgages are now portable, so home buyers should not pay the penalty if they move house. Some lenders allow small capital repayments - typically 10 per cent a year - during the fixed-rate period. A handful of mortgages have redemption penalties that go on beyond the end of the fixed-rate period.

Borrowers might want to look at the mortgage company's track record for setting its standard variable rate, which they will pay at the end of the fixed-rate period. Estimates suggest that about one in four borrowers moving from a two-year fixed rate pays the standard variable rate for several months or more. In these circumstances, a lender with a lower standard variable rate will save money.

But home buyers might be surprised to find that even the way lenders calculate interest differs. For repayment mortgages, this has a direct impact on value for money. Portman's two-year fixed rate, at 4.30 per cent, uses annual interest calculations. A higher rate, charged as daily interest, can work out cheaper.