Borrowers should not rule out fixed-rate mortgages, even though the Bank of England is expected to follow America’s Federal Reserve and cut interest rates next month.

The Fed slashed rates last week by an emergency 0.75 percentage points and is expected to cut by another half a point when it meets on Wednesday, in an attempt to avert recession. This has led to calls for the Bank of England to reduce the UK rate by 0.5 percentage points when the monetary policy committee (MPC) meets next month.

However, Mervyn King, the Bank’s governor, said last week that aggressive interest-rate cuts were not the solution to the financial crisis, suggesting a cut of just a quarter point was more likely. The Bank is also concerned about rising inflation, which limits its ability to cut rates.

The markets are pricing in Bank rate at 4.25% this time next year, but many economists think this is unlikely - unless a recession takes hold here too.

Philip Shaw, chief economist at Investec Securities, an investment bank, said: “I can see why the markets are concerned about the economy, but we believe a meltdown in the capital markets will be avoided and given the current inflationary pressures, I think that the MPC will be cautious about cutting rates. We think it is more likely that Bank rate will end the year at 4.75%.”

Meanwhile, banks have been increasing rates on trackers for new borrowers, and fixed rates have been coming down – meaning fixes are looking increasingly good value, despite the outlook for rates.

Ray Boulger at John Charcol, a broker, said: “We are getting to the stage where the gap between fixed and tracker rates is such that fixing could make sense even though interest rates are expected to fall further.”

Nationwide, Abbey, Alliance & Leicester and Woolwich have all recently increased their tracker rates. Abbey raised the rate on its 100% two-year tracker by 1.15 percentage points, from 6.84% to 7.99%, last week.

Banks say wholesale markets, where they borrow to fund their mortgages, are still seized up, even though rates there have come down in the past few months.

As Abbey’s latest changes highlight, borrowers with little or no deposit have been among the worst hit. In many cases they will have to pay a significant premium in order to get a mortgage. Those taking out big mortgages are also paying more and have less choice.

Melanie Bien at Savills Private Finance, a broker, said: “The best rates are only available to those with deposits of at least 10% or more, sometimes only up to £300,000 to £500,000, and unfortunately the situation is unlikely to ease significantly in the near future.” Before the credit crunch, the best two-year trackers were priced well below Bank rate. This time last year, Dunfermline building society had the best rate at 0.27 points below Bank rate. The best you can get now is just 0.01 points under Bank rate, or 5.49%, from Cooperative Bank.

At the same time, some lenders have been reducing their fixed rates. David Hollingworth at L&C Mortgages, a broker, said: “Many people are quick to dismiss fixes in a falling interest-rate environment, but there are a few very good deals available at the moment that are worth considering.”

Most fixes are on a par with variable-rate deals – about 5.5% to 6% for a two-year product – but you can get better than that. First Direct has a two-year offset mortgage that is fixed at 4.75% – 0.75 points below Bank rate.

Interest rates would therefore need to fall three times for the rate on Cooperative’s tracker to be at the same level.

Only a minority of economists think rates are likely to come down by more than that. Howard Archer, chief UK and European economist at Global Insight, said: “The Bank of England is likely to cut interest rates gradually but steadily as it carries out a difficult balancing act between trying to support growth while containing the underlying inflation pressures. We are forecasting interest rates to fall to 4.25% by early 2009 but, with the downside risks to the UK economy mounting, there is a growing likelihood that interest rates will fall further and faster than this.”

The First Direct deal, which is only available direct from the bank, has a £1,498 fee although those remortgaging receive free legal work. It is only available for loans up to 80% of the property’s value and the maximum loan size is £300,000. If you need to borrow more than that, or want to keep the upfront costs down, it has another two-year fix at 5.25%. The fee on this product is just £99 and there is no maximum loan size, although a deposit of at least 20% is still required.

FIXED-RATE DEAL WAS WORTH SNAPPING UP

Derek Avenell and his wife, Amanda, pictured here with their eight-year-old son, Justin, have acted quickly to take advantage of a two-year fixed-rate mortgage from First Direct, which has a market-leading rate of 4.75% – 0.75 points below Bank rate.

The couple, from Westbury in Wiltshire, are remortgaging on to the First Direct deal, because the fixed-rate term on their current loan, which is with Halifax, is about to end.

Derek, a 39-year-old financial adviser, said: ‘We considered going for a variable rate, but I did a bit of research and this deal was so much cheaper than anything else. We don’t think interest rates will fall below 4.75%, so it was too good to miss.’