Fixed-rate mortgages are a good option for anyone who needs certainty in their repayments but there are pitfalls which potential borrowers should be aware of. The main problem with taking out a fixed-rate mortgage is the lack of flexibility. Under normal circumstances, with a variable rate, loan borrowers can choose to increase their monthly payments to repay the loan early, although this can also sometimes cause problems.

It is generally possible to simply pay off your loan or large portion of it should you happen to receive a large bonus or come into an inheritance.

But it is not that simple with fixed rates. Lenders generally go into the money markets and borrow money at a fixed rate which they then lend on. At the moment, because interest rates are rising, and the expectation is that this will continue, fixed-rate funds are more expensive than variable rates and thus you pay more.

If you then decide to pay the loan off early there is a cost to the lender which is passed on. But you must be careful which lender you go to for a fixed rate. Some simply charge you the amount they are losing on the transaction. But many others charge a set rate which can be very much higher.

Most of the former and current building societies charge as much as six months interest. As a result, a borrower who has a £75,000 fixed rate of 6.4 per cent for three years, would end up paying £3,329 in a redemption penalty.

EBS also charges a set amount. For fixed rates of one to three years, that is three months' interest, half the above penalty is charged. But for fixed rates of up to five years, it jumps to six months. Fixed rates of 10 years, which are admittedly less common, involve a penal penalty of 12 months' interest, double the amount charged by the others.

The two big banks calculate the actual cost of breaking the loan agreement. For example, if you took out the same £75,000 five-year fixed-rate loan with AIB in September 1997, the rate would have been 7.4 per cent. There are two years left to run and AIB is currently lending two year money at 6.25 per cent. As a result, the penalty is 1.15 per cent, or the difference between the two, on the reducing monthly balance over the next two years. That would come to a penalty of around £547.

However, if you had taken out a two year loan last year, the rate would have been 4.95 per cent. The one year left on that could be lent on at 5.6 per cent, generating a profit for the bank and thus no penalty would be charged.

Of course it would not often be advisable to repay a loan on such a good rate of interest unless it is particularly large. You may be better off repaying other loans or credit cards which charge a far higher rate or even investing it if you think you would get a higher return than 4.95 per cent or, if tax relief is included, 3.86 per cent.

The other important issue for all borrowers, whether they are in fixed rates or not, is the way that interest is applied to the account. 10 years ago all the building societies simply applied the interest on an annual basis. But this means that any repayments you made throughout the year did not accrue to your account. Borrowers were effectively paying interest on money they did not owe. This changed in 1996 when some lenders switched over to plc status. One building society, Irish Nationwide, has not changed this.

However, there are thousands of borrowers who took out their loans pre-1986 who are still suffering under the old system with other lenders.

THIS works out particularly badly for anyone who has chosen to increase their repayments to pay off the loan early. They are effectively not getting any return on that money until the end of the year.

All First Active's older borrowers are in that position. The company says that its policy is not to change this unless the loan changes, although it does look at cases individually.

All of these lenders now have their interest calculated daily and charged monthly. Borrowers with the two main banks, Bank of Ireland and AIB, are in a slightly better position, their interest is only applied quarterly but still calculated daily.