Fixed rate mortgages become a minority choice

With fixed rate mortgages stubbornly refusing to fall much in price, variable rates continued to be flavour of the month in August, according to the John Charcol Index. Less than half of borrowers (41.9%) chose a fixed rate in August, the lowest number since December last year.

"Following the MPC's decision in August to extend the Quantitative Easing programme, plus subsequent comments from Mervyn King, it increasingly looks as if interest rates will remain low for at least 2 - 3 years on the back of a very slow economic recovery." comments Ray Boulger of John Charcol.

"Taking this into account we have continued to advise an increasing proportion of our clients to take a variable rate mortgage, as the differential between fixed and variable rate pricing is now such that fixed rates appear to be discounting the rise in interest rates which will eventually happen too much, too quickly."

The John Charcol Index shows that the reduction in take up of fixed rates has not only been restricted to individual cases; the volume of lending has fallen even further, to only 35.6% of the total, clearly indicating that borrowers taking larger mortgages were particularly attracted by variable rates. Indications so far this month are that the proportion of clients choosing a fixed rate is now stabilising.

Boulger continues, "Nearly 10% of our clients choosing a variable rate went for a discount off SVR rather than a tracker, reflecting in part some very cheap discounts but also our revised view on the relative merits between tracker and discount rates. In the 1990s John Charcol was at the forefront of promoting trackers in preference to discounts off SVR, to provide borrowers with certainty that their mortgage rate would follow Bank Rate. This followed lenders increasingly failing to pass on Bank Rate cuts in full and has since been a major benefit to borrowers, especially over the last year.

"However, we have now come full circle. With most SVR rates now between 4% and 6%, and the most expensive at 6.45%, the spread above Bank Rate is so large that it is now more likely to narrow than widen from here. It will narrow either when funding for the mortgage market improves, thus increasing competition, or when Bank Rate rises significantly. Neither of these is likely to happen to such an extent that the difference between SVR rates and Bank Rate narrows in the near future but discounts are now likely to perform at least as well as trackers, and in some cases better over the medium term.

Boulger continues, "Figures out this morning from The British Bankers Association (BBA) showed the number of mortgages for house purchases approved by the major banks in August was up 81% from the same month a year ago. Our index figures reflect this and show that the share of the market taken by purchases increased again last month, to 57.4%. Current market conditions are likely to result in purchases continuing to take over half of the market until at least the end of this year."

First Time Buyer (FTB) activity as a percentage of total purchases increased a little on the month to 13.1%, but is still well below the percentages seen earlier this year, as many potential FTBs continue to struggle to find sufficient funds to cover the deposit and associated purchase costs, and to meet lenders' onerous credit score requirements for high LTV mortgages.

The John Charcol Mortgage Index is published monthly, tracking three important statistics, based on mortgage business written by John Charcol. The index is a leading indicator of trends being based on mortgage applications submitted to lenders, whereas figures reported by the Council of Mortgage Lenders (CML) and the Bank of England (BofE) are based on completions, which typically take place 2-3 months after the mortgage application is submitted.