With interest rates now firmly on the way back up many are questioning whether to fix their mortgage payment or leave it variable.
There are arguments either way but there is also another more novel solution - repaying capital with the additional premium.
According to Barry Coleman, managing director of mortgage brokers, Finance Matters, the big fear is that interest rates have turned the corner and the recent record low levels will start to rise and the cost of servicing debt will rise sharply. Of course no-one wants to have to make a higher repayment than is necessary.
According to Mr Coleman, the lenders are still smarting from having to compete with Bank of Scotland, the new entrant. "They are exploiting people's fear of what could happen by heavily promoting a switch into a fixed rate, just in case."
At the moment the lowest variable rate for new borrowers is 4.39 per cent. At the same time after recent rate increases five-year fixed rates are available at 6.5 per cent which is a 48 per cent increase on current variable rates.
Of course if variable rates were to go above 6.5 per cent over the next five years then it could have proved to be a smart move to fix your rate at the moment. However, most analysts believe that rates will remain below 4 per cent next year and predictions after that are really no more than guesses. However, if the European Central Bank runs the euro zone's affairs in the same way as the Bundesbank it is unlikely that interest rates will go back up to previous highs.
The other problems of course with fixing rates is that substantial penalties are usually involved to get out of a fixed rate loan. On top of that if variable rates do not exceed 6.5 per cent over the next few years you may feel as if you have had a bad deal. But according to Mr Coleman borrowers who are prepared to pay the high fixed rate should do it in a different way. He advises taking the difference between the current variable rate and current fixed rate on offer and converting it into a supplementary capital repayment.
In practical terms this would mean paying the higher amount which will repay your capital faster than otherwise. For example, an additional £120 a month amounts to £7,200 over five years on a mortgage of £100,000.
In effect, according to Mr Coleman, you are buying your own property which may also appreciate in value.
If the pessimists then prove correct and interest rates do rise to 6.5 per cent, you can simply stop making the additional repayment, and your repayment should not increase as instead of making supplementary capital repayments you will be putting the money into increased interest charges.
In other words, one possible choice is to pay a higher rate of interest to guard against a potential rise in variable rates or to stick to your variable rate and pay the fixed rate difference towards the capital of your loan.
Of course for some people paying that extra is worth it simply for peace of mind. If you have very substantial borrowings this is particularly the case. Although, in this case you could choose to fix part of your loan and keep the rest on variable, with the additional capital repayment if you wished.
On a £75,000 loan, the current gap between the two rates would mean an additional £3,209 capital being repaid over three years and £5,347 over five years. For a larger loan of £200,000, an additional £8559 would be paid off after three years and some £14,269 after five years.
The main problem with this approach is that if the variable rate were to rise above the 6.5 per cent or other rate you chose, you would have no protection. So, while it is extremely unlikely that, say, the euro would fail or there would be another shock the equivalent to tearing down the Berlin Wall, you would have to meet the higher repayments and would have no insurance.
One other issue you would need to check is whether your lender will accept the additional payments immediately. Most lenders will but others such as Irish Nationwide will only take the extra into account at the end of the year.
