Major lending institutions warn that recent increases in fixed rate mortgages signal the end of falling interest rates and record low home loans, writes Gretchen Friemann

To fix or not to fix - this is the crucial question for homeowners over the coming months as major lending institutions warn that the recent increases in fixed rate mortgages signal the end of falling interest rates and record low home loans.

If the banks are correct, borrowers have already missed the boat for the cheapest fixed rate loans in more than a generation and are now paying more than variable mortgage holders and despite the ECB's decision to maintain rates on hold at 2 per cent.

This is because fixed-rate mortgages are priced according to bond yields and interest rate swap markets - the rates at which mortgage lenders borrow money to finance home loans - whereas variable rates are driven by the ECB.

In recent months increases in swap rates have moved in tandem with the dramatic swings on the bond markets, almost eliminating the banks' profit margins on fixed term loans.

And although the international money and bond markets have a lagged effect on fixed rate mortgages, the banks' recent pain is now being passed on in full to homeowners.

Up until a week ago, new homeowners with the Bank of Ireland could take out a two-year fixed rate mortgage at 3.29 per cent, but now, thanks to the biggest sell-off in bond prices in nearly a decade, the cheapest deal you can get from them is 3.85 per cent.

In real terms this means the monthly repayments on a new Bank of Ireland €100,000 mortgage taken out over 20 years, will jump by €28.88 for two-year fixed rate customers.

What's moving these rates? It has to do with a bond market reversal which saw record low 10-year US Treasury notes surge to over 4.15 per cent from 3.11 per cent within weeks.

There are a number of factors behind the bond market sell-off, but for homeowners it's a critical time.

Many economists predict ECB interest rates will remain static for the short to medium term as the larger euro-zone economies languish in recession.

Those on variable rates then can look forward to low monthly outlays for some time while those on fixed rates continue to pay higher premiums.

Despite this discrepancy, IIB is encouraging its customers to consider fixing their mortgages to insure against an anticipated variable rate rise next year.

Mr John McAlinden, head of marketing for IIB home loans, said: "We are encouraging people to start thinking about fixing because there is great value in the fixed rate.

"And it provides security for homeowners or families on a tight income who need to know how much their monthly outlays are one or two years down the track."

Two weeks ago, the bank moved its two-year fixed-rate mortgages from 3.39 per cent to 3.69 per cent.

Although there are emerging signs of a stronger global economy, the slump in the euro and worries over larger budget deficits have convinced many economists that interest rates are set to rise in the medium term, low variable mortgage rates, like Ulster Bank's new customer rate of 2.85 per cent, are still proving attractive to those determined to benefit for as long as possible from the record low interest rate environment.

Homeowners unsure of whether to abandon some of the cheapest variable home loans ever offered should contemplate splitting their mortgage.

That way, Mr McAlinden, advises, consumers can have the best of both worlds.

He said: "If customers fix part of their mortgage on the variable rate, they can enjoy the security of fixed-term rates as well as the benefit of the low short-term rates."

The prospect of seemingly unending low interest rates has persuaded many homeowners to opt for variable rate mortgages.

According to Ulster Bank, only 10 per cent of its customer base in the Republic holds a fixed rate mortgage.

But Mr Derek Craig, product manager for mortgages at Ulster Bank, warns the consensus in the financial community is that interest rates have turned a corner.

He said that customers buying variable rate mortgages were gambling on interest rates staying low.

"I think these fixed rate rises are the beginning of a new trend. Rates normally fall and fall and then start to rise again."

In the UK and in the US, mortgage rates have also begun to climb again on the expectation that short-term interest rates have hit bottom and are now heading upwards.