With interest rates at all time lows, there are many borrowers who are paying over the odds through fixed-term loans they took out a few years ago. But the problem with getting out of a fixed rate is that all the lenders will charge a penalty and those penalties really do vary.

Generally, the longer the period left on a fixed-term mortgage, the larger the interest penalty. However, contracts of ten years at higher rates are more worthwhile breaking. Contracts with only a little time left to run are generally not worth breaking.

This is one of the biggest problems of taking out a fixed-rate mortgage, the other being that you cannot pay off your mortgage in lumps sums or even overpay each month.

However, ICS has gone some way to addressing this problem. It allows up to 10 per cent of the loan to be paid off each year without penalty and also allows payments to be increased by around 3 per cent a year.

The rates on fixed-term mortgages tend to be higher than variable rates, as borrowers pay for the insurance taking out the cover. If variable rates were to increase, people on fixed rates benefit as they pay less than those on variable but when the variable rate falls, those on fixed rates suffer as they end up paying significantly more than other borrowers.

For example, anyone who took out a five-year loan in 1996 would still be paying as much as 8.5 per cent, almost double the rate now being offered to first-time buyers. Just under 10 per cent of borrowers went for this option at that time.

But to get out of this and take out a new mortgage would be very expensive, with penalties ranging from around £3,000 to almost £7,000. Lenders say they are forced to charge penalties of this kind. They say that for every fixed rate mortgage issued, they have funding on the other side, whether from fixed rates to savers or from the market. And when depositors or investors look to lock in their money over the longer term, they look for higher rates than they would for short-term deposits.

Nevertheless, this does not explain the significant differences in penalties among the lenders. In the US, the situation is very different with only very small penalties being applied. Nearly all US mortgages are fixed but people generally swap out of them as rates fall. This is because there is a very large "swops" market in the US where the banks can swop fixed rate for variable funding and vice versa very easily. With the advent of the euro, this sort of a market is likely to develop in Europe and the days of large penalties would then be over.

But if you are thinking of breaking a fixed term contract, it is important that you do your sums. The penalty is, of course, most important but also the amount of time remaining on your loan, how much your fixed rate is compared with the variable rates on offer and the outstanding value of your mortgage.

The penalties are calculated in different ways from a simple penalty of a set amount of months' interest to complicated formula based on the cost to the lender of switching out of fixed rate funds.

First Active charges six months' interest to get out of a loan. On the example of an £80,000 loan taken out in April, 1996, at a fixed rate of 8.25 per cent, the penalty would be £3,043. EBS also charges six months' interest; its penalty would be £3,380 on a 8.46 per cent rate as it did not cut until May, 1996. ICS also uses the six months' interest formula and its penalty for the example would be £3,128.

Irish Permanent uses a more complicated formula where the penalty is either half the interest outstanding or the total interest less the amount Irish Permanent would get investing that on the market at current interest rates, whichever is lower. This works out as a penalty of £6,722 using the five-year loan example.

Bank of Ireland also uses the cost of funding formula, but based on the cost of funds in the market rather than the replacement value through another borrower. Its penalty would be £5,857.

AIB also uses the more complicated formula, although it assumes a rate which would be paid by a substitute borrower. So for example at the moment it would be assuming a return of 5.5 or so per cent, rather than around 3.5 per cent which Irish Permanent and Bank of Ireland would use. AIB also discounts the amount to net present value in the recognition that it getting the money up front rather than spread over the remaining years of the contract. The total for the example would be £4,739.

TSB uses the same formula as AIB but for anyone who took out a mortgage before the end of 1997 they will only be charged 90 days interest or £1,623. However, if the current system had been introduced, then the penalty would be £5,950 based on an 8.75 per cent loan.