Now that the interest rates on fixed rate mortgages have shot up, it may be a good idea to consider a tracker mortgage with a cap.

The way capped trackers work is that you would pay their current interest rate, which should be around 3%. Ah, I can hear you saying, but you’ve been telling us that the bank of England’s base rate is going to rise – so that tracker rate will rise too. Yes that’s correct, but if you have your interest rate capped, the rate on your tracker will never be higher than that cap and that limits your upside risk.

Take First Direct for example. The cap on their new tracker mortgage is set at 4.99% until 2012 whilst the rate you’d currently pay is 2.98%.

This means that if interest rates were to rise by more than 2% then you would have the security of knowing that 4.99% was the absolute ceiling on what you’d have to pay.

So you have a dilemma – go with a tracker and accept that you’ll have to pay more as interest rates rise or pay more now with a fixed rate mortgage knowing that you’re paying more now (than a tracker) but sitting comfortably knowing that your payments won’t rise until the fix terminates.

So we’re back to difficult decisions in the mortgage market! Our advice is take advice and get a mortgage professional to help you get your decisions right.