We reported recently on the likelihood that fixed rate deals on homeowner loans would probably increase in the very near future, due to an increase in the cost of banks borrowing funds on the wholesale money markets.

This week has seen a significant shift in the type of loan being chosen by new borrowers, as the average interest rate charged on a fixed rate homeowner loan has increased by around 0.6 per cent in the space of one week. At the same time as this, the average rate on variable and tracker loan deals has actually fallen by around 0.3 per cent.

The figures have been released by homeowner loan brokers, Mortgageforce, who have seen the number of fixed rate loan applications drop from 75 per cent to just 64 per cent of their total. A spokesperson for the company said “Whilst a borrower’s choice between a fixed rate and a tracker is largely based on how they expect the bank rate to behave in the next few years, when the price difference between the two is this significant, it’s difficult to resist the cheaper one.”

As an example of this difference, a potential borrower looking for a new loan from the Nationwide building society has the option of either a fixed rate at 6.28 per cent, or a tracker rate at 5.23 per cent. For a typical homeowner loan of £150,000 this will mean a difference of £131.25 every month in interest payments between the two deals.

This is quite a dilemma for many people trying to choose the right loan. One solution to the problem is to opt for the more flexible tracker deal and then make regular monthly overpayments to the same level as the cost of the fixed rate. This has the benefit of reducing the loan balance quicker while interest rates are low, thereby saving interest, with any overpayment amounts being used to mitigate any future interest rate rises by making underpayments to the equivalent level.