Borrowing shifts away from pricey fixes
The higher pricing of fixed rates, compared to their discount or tracker counterparts, has prompted many borrowers to opt for the variable rate route. This price driven trend has been particularly marked over recent months. When the gap between fixed and variable rates is narrow, most borrowers tend to choose the security of a fixed rate, however, when the gap grows and fixed rates become perceptibly more expensive, many borrowers opt for variable rates instead. In November, the disparity between the best fixed and the best variable rates widened to about 1%, compared to around 0.15% in August, when fixed rate borrowing reached its 47% peak (as a proportion of total lending). This clearly shows that pricing is the key driver in borrower behaviour and a further increase in the gap will make the Chancellor's proposed aim of developing a long term fixed rate market even more distant.
First time buyers still feeling the pinch
The proportion of first time buyer loans has fallen from 39% to 26% in a year and illustrates how difficult FTBs are finding it at the moment. With house prices continuing to climb, albeit at a more modest pace, this situation is unlikely to ease for some time to come. Indeed we could be seeing this, and even lower levels, becoming customary now. FTBs eager to step onto the property ladder should seek guidance and information on the specialist solutions available.
2004 PREDICTIONS
Borrowers should not be surprised to see further rate increases next year but they are expected to be at modest levels. We expect that Base Rate will be around 4.5% by the close of 2004. Mortgage rates will still be at historically low levels ensuring mortgage borrowing remains affordable. The combination of rising household incomes and low interest rates will ensure affordability will remain good. Remortgaging will continue to remain strong as more people see their mortgage as a brokable commodity.
Although the ratio of prices to earnings has risen markedly above historical levels suggesting that house prices should fall - we disagree. We believe the housing market will remain buoyant with demand continuing to outstrip supply and property prices will continue to increase albeit at more sedate levels. This year we have seen a modest recovery at the top end of the property market and expect this to continue, but also at sedate levels. The last few years have demonstrated how difficult it is to pinpoint house price inflation but we would not be surprised if UK house price inflation for next year ends up somewhere around 7% for 2004.
