Choosing a mortgage as rates set to rise

There are certain periods during which the search for the right mortgage can seem like more trouble than it's worth. Take these past few months: the world and his wife has known that the current cycle of declining interest rates is coming to an end, but nobody is entirely sure when this will come to a head. This means that the choice between fixed and variable interest rates is harder than normal, as mortgage-hunters must weigh the options in an uncertain environment.

The best thing to do in such circumstances, of course, is to consider what we know to be the facts so decisions to be made can be based on correct information.

Fact one: interest rates are definitely on the turn. Unless something hugely unforeseen happens in the world economy over the next few months, it seems safe to presume that interest rates in the euro-zone will begin to rise before the end of the year.

This is because the economic picture has been gradually improving of late, leading policymakers to believe that we no longer need to be able to borrow money so cheaply. Raising interest rates is the natural response to such a situation, with both Britain and the US already having taken initial steps in this regard. The US raised interest rates last week for the first time in three years. Fact two: these higher interest rates will translate into higher rates and thus higher repayments for mortgage-holders. The rationale here is that when it becomes more expensive for lenders to source the cash that they extend to borrowers, this extra cost must be passed on.

This will be unavoidable for holders of variable and tracker loans, but will not affect the holders of fixed loans who have locked into a particular rate for a fixed period. Fact three: fixed mortgage rates, which tend to reflect where a lender expects interest rates as a whole to move in the future, have already been on the rise for a few months now.

With these facts in mind, the hunt for a mortgage becomes a little more nuanced, particularly if the hunter sees some appeal in taking out a fixed-rate loan.

Reasons for fixing a mortgage can vary, but the most sensible motivation tends to be a desire for stability in repayments over a period. They will, however, pay a premium for this security, with fixed rates generally a touch higher than their variable sisters. New buyers may also be interested in tapping into a lender's special offers (low rates) for one-year fixes.

Outside of this, some would-be fixers are motivated by the desire to "beat the cycle", or catch a cheap fixed rate before the cycle moves back up and rates all begin to rise. The idea is that a mortgage-holder could be lucky and, all things considered, end up on a cheaper rate than most other people for a couple of years.

The argument against this is that any opportunities for beating the cycle have already passed, with recent upward movements in fixed rates from ICS and First Active proving the point.

"The reality is simple - with standard variable around 3.5 per cent and trackers at approximately 3.25 per cent, it is very difficult to recommend fixed mortgages," says Mr Peter Bastable of mortgage broker, Simply Mortgages. Mr Bastable is a fan of trackers but he says "As always, there is no straightforward answer. The question to pose is: how long will it take the tracker or variable rate to catch up with the fixed and how many months will it take after that for the higher repayments on the fixed to justify the decision you made to fix? If we knew the answer we would be very special!"