Borrowers 'staying one step ahead of interest rates'

By Kay McLellan

17 Jul 2006

The survey showed fixed rate deals are superceding trackers as the most popular mortgage product.

Key trends for Quarter 2 2006:

Fixed rates replace trackers as borrowers’ chosen product
First time buyers faltering
Remortgages remain popular for financing lifestyle
Buy to let activity languishing

“With no Bank of England base rate rise for nearly a year now, borrowers are getting increasingly apprehensive of a rate hike as each month goes by,” said My Mortgage Direct joint director Cath Hearnden. “They are wisely deciding that it’s safer to cut their losses and opt for a fixed rate now rather than risk missing the best deals when the inevitable happens.”

First time buyers (FTBs) are back on the blocks after a flurry of activity last Christmas with just 8 per cent of all applicants setting up home for the first time in May and June. Again, it’s wobbly interest rates that are causing this end of the market to falter.

“Rates are extremely low right now but for newcomers to the housing market, this is all they’ve ever known,” said Hearnden. “Talk of a rise of 0.5 per cent is viewed with concern and is scaring some people off taking on a mortgage that - they believe - could spiral out of their control.”

But the reality is that mortgages have never been more affordable and there are many excellent fixed rate deals around to give FTBs a leg-up the property ladder. “We would strongly advise first timers to opt for a fixed rate in order to take the uncertainty of rate rises out of the picture. After all, that’s exactly what they are for,” added Hearnden.

Borrowing on the house continues to prove a popular way for many homeowners to finance their lifestyle, with applications for remortgages increasing by 31 per cent over the previous quarter and 50 per cent over the same period in 2005.

“With house prices so buoyant and rates so low, this trend continues to dominate the market,” said Hearnden. “But using your mortgage to accumulate debts needs careful monitoring. It’s advisable to take expert advice from a broker on how to use your property wisely to raise funds and avoid borrowing from Peter to pay Paul.”

Good news for the future finances of many is indicated by a decline in interest-only mortgages. “Interest only mortgages are always a particular bug-bear of ours but I’m pleased to see them on a downward trend this quarter,” said Hearnden. “From a nerve-jangling high of 55 per cent at the end of 2005 they have dropped back by 10 per cent over the last six months to an average 40 per cent. Still too high in my opinion, but heading in the right direction.”

Newcomers to the buy to let (BTL) sector are finding that lenders are keeping rates just a bit higher than they would like, shaving too much off profit margins to make the idea worth pursuing for many. “Whilst some lenders are offering slightly better rental calculations higher fees are cancelling out the advantage, resulting in BTL applications dwindling over the past quarter,” said Hearnden. “However, those with established buy to let portfolios are finding some excellent refinancing deals on offer right now.”