Hedging your bets might prove to be best option

Still pondering whether to fix your mortgage or stick with a variable rate? Those who remain confused as to which option to take could do worse than consider splitting their home loan between the two.

With most analysts and commentators predicting that interest rates across the euro zone will rise over the next few years, a growing number of people are considering fixing their mortgage rate.

Yet, no-one can know for certain how high interest rates will go and how long they will remain at those levels. Much depends on the nascent economic recovery in France and Germany and whether or not it takes root and flourishes.

How the millennium bug affects companies and their profitability, whether oil prices continue to rise and what other inflationary pressures emerge will also have a bearing on where interest rates are in two to three years' time.

Another large unknown is how competition will affect the Irish mortgage market in the future. The recent entry of Bank of Scotland to the variable rate residential market has driven the rates of other lenders down by nearly a full percentage point in some cases without any move in official interest rates.

Both those who feel there are too many unknowns to commit their entire mortgage to a fixed rate and those burned in the past by fixing for long periods only to see interest rates fall sharply can hedge their bets by splitting the mortgage.

It should also appeal to those who know they might be pushed to service their mortgage if they were suddenly to find the rate of interest they were paying had risen sharply.

They can have the security of knowing that a certain portion of their mortgage repayment will remain constant while ensuring that they also get some of the benefits if variable rates remain lower than expected.

The other advantage of having at least part of the mortgage on a variable rate is that if a borrower comes into money - through an unexpected inheritance or a windfall, for example - they retain the freedom to pay down that part of the mortgage that remains on the variable rate. At present, most mortgage lenders do not allow borrowers on fixed rates to reduce the amount borrowed.

Shay Atkinson, managing director of National Mortgage Services, says most of the people he comes across who opt to split their loans are those who anticipate coming into extra cash but are not certain how much they will get, or when.

"Maybe they are going to get a bonus or commission at the end of the year and they want to use it to reduce the mortgage but they don't want to be fully on a variable rate. It allows them to spread the risk," he says.

Generally, the lending institutions are happy to allow borrowers to split their mortgage but lack of awareness means there is not that much demand for the option at present.

Irish Permanent, the state's largest mortgage lender, says it is doing very little of this type of business with only two customers per week opting to split their mortgage. "It's negligible as a proportion of the total," says Barbara Patton, head of marketing.

For the borrower, there are no extra costs involved, although Irish Permanent faces increased administration costs as the mortgage is effectively regarded as two separate loans and two accounts have to be set up to administer it.

In Irish Permanent's case, borrowers have to make two payments, or set up two direct debits, although this is not always the case.

But otherwise they have total flexibility. The two loans can be organised over different terms - the fixed-rate loan can be over 20 years while the variable rate loan is paid off over less.

The loan can also be split any way the borrower chooses - borrowers can split it half and half, opt for a 70/30 split, an 80/20 split or whatever suits them best.

Mr Atkinson also points out that borrowers can split the loan between different fixed rates - putting part of the loan on a five-year rate and the remainder on a one-year rate, for example.