A flurry of new fixed-rate mortgages has appeared in the lending market, and first-time buyers need to think long and hard before they consider one.

Five years ago, at the height of the currency crisis when variable rates had reached 18 per cent, thousands of homeowners retreated into two-, three- and five-year fixed rate mortgages at 10 to 11 per cent APR. Given that 30-year averages up to then had been 11 per cent, many were happy to hedge their payments at that rate for the next five years.

No one could predict at the time that when rates did fall back they would drop to the 77.5 per cent APR region, where they remain today. Yet the payment differential between an 11 per cent and 7.3 per cent APR rate for a typical £40,000 mortgage (typical for 1992) is about £100 per month, or £6,000 over five years. With many commentators expecting interest rates to drop by as much as 2 per cent over this year, there is a sense of deja vu about the marketing of these latest fixed rate offers.

Unfortunately, then as now, breaking a fixed rate mortgage can be expensive. Some lenders charge a few months repayment as the penalty; others charge all or some of the interest they lose by allowing you to redeem the fixed rate early. Depending on the length of the remaining term it may not be worth your while to break the contract. Also, what many people do not realise is that the redemption penalties must still be paid even if you sell your house and clear the homeloan.

Fixed-rate mortgages of up to two or three years are suitable for people who are already stretched financially and for whom a sudden or prolonged interest rate hike could cause serious difficulties. It also suits people who prefer to know exactly how much their outgoings are over a period of time.