Pay just 2.29% on your current mortgage interest rate

There is so much talk of the threat of rising interest rates that you could be forgiven for thinking it's a certainty rates are about to go up.

Of course, the fact that the Bank of England Base Rate is at a record low of 0.5% means it is virtually guaranteed to go up at some point. But it is by no means certain that it will rise next month, the month after or even this year. Indeed some pretty heavyweight commentators reckon rates will stay low for a while yet.

Roger Bootle, renowned economist and adviser to the Government, who called the housing market crash long before it happened, thinks rates will remain below 1% for five years, possibly even remaining at 0.5%. And The Centre for Economics and Business Research published a study at the end of last year predicting that rates will stay at 0.5% until 2011 and under 2% until 2014.

Of course, I could easily find opposing views from equally respected economists and organisations, but the point is there is NO consensus on rates, and still a good chance they will remain low for the foreseeable future.

Therefore it can be argued that going a cheap tracker deal is actually still your best mortgage bet, despite margins being wide.

Cheap as chips

Variable rates (trackers, discounts and SVRs) are priced at a significant discount to equivalent fixed rate mortgages -- at least 1% cheaper at the best buy end of the market -- which is why they are proving so popular in the current climate.

The cheapest discounted variable rate is HSBC's two-year discount at 2.29% but it does come with a whopper of a fee at £1,499 and you need 40% upfront to get the deal.

The cheapest comparable variable and fixed rates I could find were ING Direct's 2.59% two-year tracker deal with a £795 fee (available up to 60% loan-to-value) and Principality Building Society's 3.44% 2-year fix (the cheapest on the market) with a £999 fee (this is actually available up to 65% LTV but it is cheaper than the 60% deals, so it seemed fairer to use this).

Just by looking at the pay rates you can see why borrowers are tempted with the tracker option. On a £150,000 repayment mortgage the tracker would cost you £680 a month, and the fixed rate £746. That's a saving of £1,584 over the two years with the ING tracker. Not to be sniffed at, and of course the bigger your mortgage, the greater the savings from taking the lower rate.

The Bank of England Base Rate would have to increase by at least one whole percentage point in the very near future to make the best trackers look uncompetitive over the two years compared to the best fixed rate.

I am not suggesting for a minute that this is impossible, as nobody knows what will happen to rates. Even more importantly, rates could rise by more than this amount within the two-year deal period.

No tie-ins

Even better than the two-year trackers in my book, and even cheaper in some cases, are lifetime tracker mortgages.

If you have 40% equity or deposit HSBC's term tracker is a steal at 2.49% (see table). And with no Early Repayment Charges (ERCs) you are free to flee to a fixed rate if rates do start to rise astronomically. Plus if they stay low, your margin of Base Rate +1.99% is set for the life of the loan. It's a win-win.

Most term trackers, though not all, come without nasty ERCs, so are well worth considering if you think you might want to switch to a fix in the future.

Another great option offered by some lenders is the 'drop-lock deal' where you choose a tracker rate and your lender will let you switch without penalty to one of its fixed rate products if things start to get a bit hairy. Nationwide, for example, allows borrowers to do this across all of its tracker range.

The obvious risks

Of course, it cannot be overstated that by taking out a tracker deal you are leaving yourself wide open to the risk of rising interest rates. Even if you do your sums and work out how quickly Base Rate would have to rise to leave you out of pocket compared to a fixed rate, that possibility still remains. Rates could rise by more than you, and the experts, predict and you could face vastly increased monthly repayments.

You need to think carefully about this, especially if you are considering a variable rate that ties you in with hefty ERCs.

But with fixed rates currently so much more expensive than trackers, perhaps it is worth taking the risk and enjoying the lower repayments possible now. Below are some of the best variable deals.

20 top variable and tracker deals

*homebuyer only

**First-time buyer only

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If you need help getting the best mortgage use our resources.

First, adopt this goal: Cut the cost of your mortgage and pay it off early

Next, watch this video: Getting through the mortgage maze

Then, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.