Borrowers turn to fixed rate security

In the last three years, since the base rate has been at 0.5%, a large swathe of borrowers have reaped the rewards of low rates. Many have remained on lenders’ SVRs rather than remortgaging.
But latest figures from the Council of Mortgage Lenders show that with the economic outlook remaining uncertain, more borrowers are seeking the increased security that comes with a fixed rate mortgage.
In December 2011, 68% of all mortgage loans advanced were fixed rate deals - the highest in over two years. While the percentage of discounted loans remains static, tracker rate deals have seen the biggest fall to 20% of all loans, down from 37% at the start of 2010.
Between summer and autumn 2011 the cost of fixed rate mortgages tumbled while trackers held firm, meaning the gap between the cost of fixes and trackers narrowed. Later in the autumn we saw LIBOR rise, which pushed up tracker rates, further boosting the competitiveness of fixed rates in the market. In October 2011 the gap between the average two-year fix and average two-year tracker was just 0.64%, according to Moneyfacts.co.uk - the closest they have been since January 2009.
While this gap has grown to 0.82% in recent months, it remains well below the levels of the previous two years. Unless it widens significantly again it is likely that borrowers’ preference for fixed rates will continue.
Of course, the preference for fixed deals is not just rate led. Clearly, with uncertainty over the base rate, people are choosing a deal that will not be affected when it does eventually rise. Despite many lenders offering borrowers tracker deals with the ability to switch to a fixed rate at a later date without early repayment charges, the appetite for variable rates among borrowers appears to be in decline.
At Nationwide, it is the five-year fixed rate mortgage that remains the most popular, both in branches and through intermediaries. Borrowers are taking the opportunity to lock in over the longer term to some of the lowest rates ever seen. In normal circumstances borrowers tend not to take such a long-term view, instead preferring to opt for two and three-year fixed rates.
While the base rate isn’t predicted to rise during 2012, the economic situation is expected to be challenging. Borrowers are starting to trade short-term gains from lower tracker rates for the security of a fixed mortgage deal.

Recent figures suggest the hiatus may be over - that first-time buyers are not extinct and are breathing new life into the housing market. According to the Council of Mortgage Lenders, the number of mortgages taken out by this group increased by 7% in December. The Royal Institution of Chartered Surveyors’ housing market survey also shows an upturn in interest from some first-time buyers, which helped bolster house sales in January.
Such positive stirrings from this beleaguered group are not that surprising. The imminent end of the Stamp Duty holiday on properties between £125,000 and £250,000 has spurred people into action. After March 24 properties in this price bracket will be once again taxed at 1% - meaning a potential saving before that of anything between £1,250 and £2,500.
This flurry of activity proves that the Stamp Duty holiday has provided a lifeline to borrowers. Yet chancellor George Osborne has ruled out extending it, claiming it was ineffective.
So have other factors helped drive the increase in activity? Figures from Halifax at the end of last year show affordability among first-time buyers is at its highest since 2003, based on the ratio of average house prices to earnings. But the fact that the average deposit is £27,032 has proved a big enough hurdle to keep first-time buyer numbers depressed.
The recent return of 95% LTV deals has been a leg-up for buyers who have been saving over the past few years. Taken with the Stamp Duty holiday, what better incentive for people to take a step on to the ladder?
We won’t have to wait long to find out whether first-time buyers are back for good or if the figures are just a last-minute dash to beat the Stamp Duty deadline. Sadly, the likelihood is that after March demand will fall.
The government may say its next shot in the arm is the mortgage guarantee indemnity scheme for new-build, but in its early months it is unlikely to provide the same boost as the Stamp Duty holiday. The cost of extending this would be relatively small and could avoid an inevitable slump in sales this spring, traditionally a time when activity picks up.
The Stamp Duty holiday has been a tonic for the fragile housing market so if anyone in Westminster is reading this, don’t take this lifeline away just when it’s started to do some good. There is no dishonour in changing your mind.