With interest rates predicted not to rise above 0.5% until 2014, why would you choose a fixed rate mortgage?

Ernst & Young have predicted that interest rates will remain low for the foreseeable future, not rising above 0.5% until 2014, so is there any point choosing a fixed rate mortgage at the moment?

In periods of high interest rates, such as those of 5.5 per cent seen before the credit crisis struck, a fixed rate mortgage offers shelter, and a competitive rate compared to mortgages which track the base rate, which is why, until last year, fixed rates consistently took the biggest share of the residential mortgage market.

But now the tide has turned, and since interest rates hit rock bottom (and then stayed there), homeowners on a tracker mortgage have been cashing in on lower monthly repayments, and tracker mortgages have started taking a bigger chunk of new mortgage business.

According to mortgage advisors John Charcol, variable rates mortgages accounted for 84% of sales in March, although consumers have started to waiver since the change in Government, amid uncertainty about whether a rise in interest rates was on the horizon, but Ernst & Young says not.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, says that "To prevent CPI inflation moving below 1% it will be necessary keep the Bank base rate low at 0.5% for much longer than the OBR and the markets have anticipated." He added: "A base rate of 0.5% will begin to look like the new normal."

The base rate will remain on hold until the end of 2013, according to the Ernst & Young ITEM Club, which provides 'objective economic forecasts', although this forecast is dependent on the assumption that the impending spending cuts announced by the Government become a reality.

There are some competitive fixed rate mortgages on the market, but the majority are available to homeowners with 25 or even 40 per cent equity in their properties. 

There are also commentators who believe a rise in interest rates will come sooner than Ernst & Young believes, including Michelle Slade from Moneyfacts.co.uk, who thinks it is "fairly likely" that a rise will come as soon as early 2011, and suggest that borrowers consider a fixed rate mortgage.

For those mortgage customers who want to take advantage of record low interest rates and competitive tracker deals but are afraid of an unexpected increase in the base rate, there is a solution.

It comes in the form of the Barclays 'drop lock' facility, introduced this week. Available to new customers of the Woolwich lifetime tracker mortgage, the drop lock feature enables them to switch to a fixed rate in the future, without incurring early repayment charges.

This is one option for those homeowners who are in a quandary about which way to go – to fix, or not to fix?

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