Borrowers Rush to Fixed Rate Mortages

by Mark Johnston

Borrowers that were worried about the threat of a steep increase in interest rates are starting to move to secure fixed rate mortgage deals in a bid to try and get more control on their monthly outgoings.Almost 50% of all mortgages taken out last month were fixed rate deals that offer a rate of interest that doesn’t change in line with interest rates. These deals are often taken out for a set period such as two, three or five years. Doing this time the rate of interest that you pay back on your mortgages remains the same so you know exactly how much you need to pay each month.

Other mortgages such as tracker, variable or discount mortgages; change in line with interest rates. Most lenders use the Bank of England base rate to track their mortgages against but not all. If the base rate increase, so will the monthly payments for these types of mortgages but if the rate reduced, the payments also go down.

Jonathan Moore, the director of the property website easyroommate, said: “Anxiety over inflation and a potential hike in interest rates has been the key driving factor in turning buyers away from tracker mortgages as they don’t want to face a sudden jump in payments.”

This move is totally against recent trends as more and more borrowers have moved from fixed rate mortgages to more flexible variable or tracker rates to try and take advantage of the historically low Bank of England base rate of 0.5%

The overall cost of fixed rate mortgages have also been coming down in order to attract borrowers back to the more secure mortgage deals. The average rate in May 2010 was 4.53% whilst in June it dropped for the seventh consecutive month to 4.45%.

Mortgage lending has increased overall with over 52,000 new loans been opened to enable new buyers throughout the UK to purchase their dream property. This was an almost 20% increase compared to the previous month and nearly 15% against this time last year.

During the first half of 2010, lenders sold 28% more mortgages when compared to the same period last year which is a positive sign that the market is on the mend.

Nicholas Leeming, commercial director of the property site Zoopla said: “The number of new home loans continues to creep upwards, which is a positive sign for the housing ­market.

“However, the growing number of borrowers opting for a fixed-rate deals suggests concern about the direction of interest rates.”

Although this may seem like good news, the Bank of England did recently change their prediction in terms of how they thought the UK economy was going to recover. The central bank now believes e a slower than first anticipated growth. This together with increases in inflation, the proposed rise in VAT and falling property prices may mean an earlier than expected rise in rates.

CML economist Paul Samter pointed out that although mortgage lending was improving, it was still way below levels prior to the credit crunch. In the short term, he expects “house purchase activity to be muted”.

He said: “Both consumer demand and lending capacity remain distinctly difficult to call, especially in the light of the Government’s austerity measures and their possible impact.”

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