Borrowers opt for fixed rates

Some 86% of mortgage borrowers opted for fixed rates in October as they rushed to beat the progressive withdrawal of the best deals on the market.

Almost half of those chose two-year fixed rates, attracted by the low headline interest rates.

This compares to 75% of borrowers who took fixed rate mortgages in the first six months of 2005 and to the average 55% in 2004.

Jon Round, remortgage analyst at Your Move, says: The window of opportunity for borrowers to take advantage of cheap fixed rates is closing rapidly. Those who want to fix must get their applications in quickly.

The trend in savings on fixed rate mortgages has been firmly downwards since August, with three-year deals showing the sharpest falls.

A borrower who took the two-year best buy fixed rate mortgage in October will pay almost 200 more in the first year than a similar borrower at the beginning of August.

Indeed in the short term, he would be 100 better off taking the two-year discounted variable rate mortgage.

Savings on discounted variable rates are now greater than the savings on fixed rates in all categories for the first time since May this year.

These sharp changes reflect the impact of the August cut in base rates.

Fixed rate mortgages did not respond to that cut as they are driven by movements on the swap markets and not by base rate decisions.

When the Monetary Policy Committee cut base rates to 4.5% base rates moved downwards to catch up with the best buy fixed rates that were already below this level, hence reducing the savings.

Discounted variable rates only fell when base rates fell and savings have increased as a result.

More recently swap rates have been increasing as the money markets become less certain that base rates will be cut in future.

This is beginning to have a marked impact on the mortgage market as the best fixed rate deals disappear.

Round says: The future direction of interest rates is much less clear than it was and this is impacting on fixed rates now.

Upward movements in money market interest rates are squeezing the mortgage lenders profit margins and many of them are offering the best deals at a loss in order to get customers through the door. This cannot continue for long.

Indeed since our report went to press, the Britannia has increased its best buy five-year fixed rate sharply from 4.39% to 4.59%.

From a borrowers perspective that is almost the equivalent of a typical 0.25% move in base rates by the MPC and would cost him 200 in additional interest in the first year alone on a 100,000 mortgage.

Discounted variable rates have not changed, so they are looking more and more attractive compared to fixed rates.

After a period where exceptionally high proportions of borrowers have been opting for fixed rates, we expect to see more borrowers opting for discounted variable rates in coming months as these offer increasing savings relative to their fixed rate counterparts.

“Borrowers should remember however that a variable rate will expose them to future base rate increases and it is by no means certain that the MPC will cut rates in the new year.

Despite widespread criticism in recent months lenders have continued to increase exit fees in an attempt to recoup some of the profits they are losing from the exceptionally low mortgage rates they are charging. They have risen from an already high 160 in April to a staggering 200 in October.

This is equivalent to 0.2% on top of the mortgage rate for a typical 100,000 mortgage. With savings on the best buy five-year deal 90% higher than a year ago and an increase of 790 it is hardly surprising that lenders are looking for extra income and making all borrowers, not just new ones, pay through the nose.

Round adds: No matter what product borrowers go for exit fees represent a nasty sting in the tail. Lenders are extracting money at the back end from all their customers that they are giving away at the front end to newcomers through low mortgage rates.