Almost three million homeowners are set to see their mortgage repayments surge, as scores of fixed rate deals near the end of their term...

Most fixed rate mortgages -- which shield homeowners from rising interest rates -- last for two or three years and the Council of Mortgage Lenders (CML) calculates that 2.8 million such loans will come to an end over the next 18 months.

Some 1.3 million borrowers took out fixed rate mortgages in 2005 and a further 1.5 million in 2006 -- mainly for two years.

But, since then, lenders have been upping their rates amid a rising Bank of England base rate. It hit a six-year high of 5.5 percent in May and the majority of borrowers will face increases of between 0.75 percent and 1.5 percent on their mortgage rates.

Those who took out fixed rate repayment mortgages at the interest rate trough of September 2005 borrowed an average of 114,000 pounds at a rate of 4.6 percent, the CML says.

If they move to a rate that is 1.5 percent higher, they will have to fork out 102 pounds per month more; repayments will rise 16 percent to 742 pounds.

Plan ahead or risk financial difficulties

On an interest-only basis, the increase is more dramatic: borrowers will have to pay 143 pounds per month more, with repayments rising 33 percent to 580 pounds.  

Michael Coogan, director-general of the CML, says the scale of the increase will be "manageable" for most people, due to increases in earnings and a cushion of housing equity built up by virtue of house price inflation.

But he urges borrowers to plan ahead and speak to their lender if they think they will face financial difficulties.

So, what are the options?

Ray Boulger, senior technical manager at mortgage broker John Charcol says most fixed rates look expensive, unless the base rate goes beyond 6 percent.

High risk loans ‘withdrawn’

Financial markets have almost completely priced in a base rate rise to 5.75 percent by August and are factoring in an 80 percent chance that it will reach 6 percent this year.

Halifax has upped its rates by 0.30 percent and Northern Rock by 0.10 percent, while other lenders have withdrawn higher-risk loans: Birmingham Midshires has scrapped mortgages with an additional 30 percent loan-to-value and Portman Building Society has withdrawn 100 percent fixed rate deals.

Currently, the best two-year fixed rate loans on the market are priced around the 5.3 percent mark.

Although many borrowers might prefer the security of a fixed rate, better value can be found in the tracker market.

Halifax and BM Solutions offer two-year tracker mortgages at 0.51 percent below the base rate, giving a current interest rate of 4.99 percent. Fees are hefty, at 1,499 pounds, but valuation and legal fees are free for re-mortgages.

"Even with two 0.25 percent increases in (the) bank rate, this will still be competitive with today's best two-year fixed rates," says Boulger.

‘Drop-lock’ deal a possible solution

Another solution might be to opt for a drop-lock deal with no early repayment charges.

With a drop-lock deal, the borrower starts on a discounted rate for a set period but if rates look set to rise, the option is there to switch onto a fixed rate.

The Skipton Building Society and Woolwich have recently launched mortgages that allow people to hedge their bets.

Woolwich's "fix and track" range allows borrowers to fix at a competitive 5.39 percent for one year, with the option to revert, free of charge, to a lifetime tracker of base rate plus 0.39 percent.

There are no early repayment charges, the loan is available on up to 80 percent of the property value and initial fees are 595 pounds.

Innovative approach to rates

Meanwhile, Skipton's new range allows borrowers to mix and match from a selection of fixed, tracker, discounted and capped rate products.

"It is great to see an innovative approach to rates reaching the marketplace," says Julia Harris, a mortgage analyst at price comparison service Moneyfacts.co.uk.

"Borrowers who want to speculate against future base rate moves ... or who would like a slice of security, but still take advantage of any rate reductions, will find these products a welcome addition to the mortgage market."