Fixed-rate mortgages decline in popularity

The popularity of tracker rate mortgages increased in February as the proportion of borrowers choosing fixed-rate loans fell to 52%, its lowest level since March 2005, according to the Council of Mortgage Lenders.

The proportion of borrowers choosing tracker-rate loans increased to 35%, from 33% in January and 14% in February last year. Floating rate products have become increasingly attractive compared with fixed-rates as consumers expect further Bank base rate reductions in the coming months.

These mortgage figures typically relate to applications taken out several months ago, and do not reflect the shrinking availability of mortgage products and re-pricing which has been a feature of the market in recent weeks.

First-time buyers in February typically borrowed 88% of the property’s value, unchanged from January, and 3.33 times their income, compared with 3.32 in January. Home movers typically borrowed 71% of the property’s value, up from 70% in January, and 2.97 times their income, unchanged from January.

Mortgage lending activity in February remained subdued. February gross lending totalled £25 billion, down 3.5% from £25.9 billion in January and 2.3% from £26.6 billion in February last year. Loans for house purchase declined in volume to 49,000, down 3.5% from 50,900 in January, and by 5.1% in value to £7.5 billion. The number of loans for house purchase has been more than 30% lower than a year ago for the last three months, and this picture of year on year declines will likely continue throughout 2008.

Remortgaging made up 45% of all lending in February, this is unchanged from January and the highest share since March 2005. Remortgaging activity is likely to remain relatively strong, and will likely represent a higher percentage of all lending for the rest of the year, given the wave of borrowers due to come off fixed and discounted rates in 2008.

CML director general Michael Coogan said: “The trend away from fixed-rate products continues as expectations of further Bank base rate reductions, probably starting this week, have increased.

“The February figures relate to completions of transactions started several months ago. More recently, there has been consistent evidence of tightening in lending criteria which will lead to shrinking pipelines of new business as the recent Bank of England’s credit condition survey made clear. We expect this process of further tightening in lending criteria to continue in the second quarter as lenders respond to the challenging market conditions.

“Individual lenders are having to balance consumer demand with service considerations, as many of those active in the market are seeing higher levels of applications than they can deal with in the wake of the overall tightening in supply of funding to the market.

"While lower short-term interest rates help a little, we continue to urge the Bank of England to use more broad-based and flexible measures to increase liquidity levels in the UK market so that firms have sufficient funding available to match consumer borrowing demand in 2008.”