February 2009 saw yet another drop in interest rates, taking them to a rock bottom 1% – the lowest since records began in 1694. While this, being a symptom of the recession, should not be cause for celebration, it does mean that mortgages are the cheapest in their history. But don't just cross your fingers and hope. Do your homework on whether a tracker or fixed-rate mortgage is the best deal for you.

First of all you will have to qualify for a mortgage in the first place. Since the credit crunch became boss, deposits required are usually now in excess of 10% of the property value, and to get the very best deals you will need up to 40%. What’s more, your credit rating will need to be impeccable, and the lender will also have to be satisfied that your job is secure.

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But if you can tick the boxes and want to get on the property ladder – or you still have enough equity in your home to unlock the widest choice of remortgage deals – what do you need to know? The number one question on everyone’s lips is: should you opt for a fixed or a tracker mortgage deal?

Fixed-rate deals

A fixed rate, as the name implies, will lock in your interest rate for the period stated. You can expect to pay an arrangement fee of around £1,000 and tie-ins (during which time it will cost you to leave) will apply for at least the length of the deal. A two-year fixed rate is now priced at around 3.5%, according to David Hollingworth at mortgage broker London & Country, but he expects them to be re-priced after the latest base rate cut.

HSBC, for example, launched a 2.99% fixed-rate remortgage deal. The deal, available at a 60% loan to value, comes with a £599 booking fee and tie-ins for the two-year term. Andy Mielczarek, head of retail products at the bank, said the product was designed to appeal to customers currently paying their lenders’ Standard Variable Rate.

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Halifax also launched a 2.99% fix after last week's base rate announcement, for borrowers with a 40%, deposit - though you will need to stump up an arrangement fee of 2.5% of the amount borrowed . That can be a hefty sum if you are dealing with a large mortgage.

In fact, look out for catches and clauses, such as large fees, with all seemingly cheap fixed-rate mortgages. Another one is extended tie-ins, as in the case of Woolwich’s 2.29% fix, which actually only lasts a year but imposes three-year tie-ins. During the two-year 'overhang' your rate will be variable (at 2.29% above base), but it will still cost you 2% of the amount you borrowed to redeem the deal.

It might also be that you are tied into a lender’s current account, which may not present the best value for your circumstances.

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Loan to values on their way up

There is also a more general danger in waiting for better and better fixes because, while you are holding off, house prices are continuing to fall. This has the effect of pushing up your loan to value (the proportion of the property value that is mortgaged), which means you may not qualify for the cheap deal you were waiting for anyway.

“In this market, where lenders are reluctant to lend, the best deals are reserved for those with at least 25% equity – that’s 75% loan to value,” says Mr Hollingworth. “House prices are expected to continue falling this year, so it’s not just a case of waiting for cheaper mortgage rates. That’s only one half of the equation.”

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Tracker deals

Base rate trackers literally follow the base rate, normally by a certain margin above. But when mortgage lenders started offering these deals priced at just a small margin above base, you can bet your bottom dollar they didn’t anticipate base rate falling to current levels.
 
Nevertheless, homeowners already on competitive trackers like this will have cause for celebration – their lender must pass on the cut to their mortgage payment with immediate effect. Try to move on to a tracker today, though, and you will find they are priced accordingly.

As interest rates have been falling, some lenders, such as Halifax and Cheltenham & Gloucester (C&G), have pulled their trackers entirely and re-priced them before making them available again. In the January base rate cut, for example, when tracker deals made a re-appearance they were priced at around 2.3% over base rate. After this rate cut they may re-appear at more like 2.5% over base, according to Mr Hollingworth.

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Collars on trackers

Bear in mind also that, in a desperate bid to balance their books, some lenders have imposed a collar – or cut-off point – on the amount their tracker borrowers will pay. Nationwide Building Society, for example, imposes a 1% collar on the base rate for new customers, which has subsequently been hit in February. This means that, if your rate is pegged at 0.5% above base, you will never pay less than 1.5%.

Most tracker mortgages are for a given time period, two or five years, for example. But a smattering of lifetime trackers are still available, which have the added benefit of no tie-ins, meaning you are free to leave the deal at any time.

The best of these deals, by a long way, is from First Direct, which is part of HSBC. At the time of writing a spokesperson confirmed the bank was still offering a lifetime tracker priced at 1.89% over base rate – this makes a current pay rate of just 2.89%. What’s more, the deal comes with a relatively low £799 fee, no tie-ins or redemption charges and requires just a 20% deposit.

Best of both worlds

One compromise for those undecided on fixed or tracker deals could be to opt for a drop and lock facility. Offered by the likes of C&G, Halifax and Nationwide Building Society, drop and lock allows borrowers to take a fix but, if a cheaper deal comes along during the fixed term with the same lender, you can switch to it without paying Early Redemption Charges. However, you will still be locked into that lender and will also have to stump up administration fees attached to the new deal.

But, ultimately, whether to opt for a fix or tracker should come down to your own circumstances, rather than any gamble on the future of interest rates. For example, if you need the security of payments for the next few years, a fixed-rate deal is likely to be the best option. But if you require the flexibility of switching at any time, look for a deal with no tie-ins, such as a lifetime tracker or even the lender's Standard Variable Rate. And, it goes without saying that any deal you choose should be affordable in the good times and the bad.

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