As the Monetary Policy Committee has opted to keep base rates at 4.5 per cent for the seventh consecutive month, borrowers are using current good two-year fixed-rate deals as an incentive to spring clean their finances. This month, home remortgages, as a proportion of new mortgages, have almost doubled, going from 17 per cent to 30 per cent.
Fixed rates in favour
Over recent weeks, two year fixed rates have benefited from aggressive competition among large lenders. Halifax and Abbey, recognising the high levels of demand for short term fixed rates, are marketing unusually competitive rates. The ‘Best Buy’ comes from the Portman Building Society, which continues to dominate the fixed rate best buys, at 4.30 per cent their two-year fixed-rate is the lowest on offer since November.
This month, first year savings achieved by switching from the current standard variable rate (6.45 per cent) to the two year best buy fixed rate stand at £1,651. As a result, in the last month there has been a 12 per cent increase in the proportion of consumers choosing two-year fixed-rates, which now account for 51 per cent of all new mortgages.
Large upfront fees make variable rates less attractive
Discounted variable rates have changed little over the last three months, with Dunfermline’s two year at 4.20 per cent, and National Counties’ five year at 4.40 per cent. Fees on two year discounted variable rates, at £699, have increased by 40 per cent over the last three months. This has had a significant impact on the savings achieved by switching from the standard variable rate (6.45 per cent). First year interest savings currently stand at £1,551, down from £1,761 in November.
Although the best buy five year discounted rate, at its lowest since June 2004, is offering good savings, borrowers prefer the certainty of fixed options.
No relaxation in lenders’ credit criteria
Competition is hotting up in the scramble to dominate the short term fixed-rate market, but, there is little evidence that suggests that lenders are changing their credit policies. There has been no relaxation of loan to value ratios, which remain steady this month, as both lenders and consumers err on the side of caution.
Jonathan Cornell, director of Hamptons International Mortgages said: “This month we have seen a marked increase in the proportion of borrowers remortgaging. At the same time, the popularity of two-year fixed-rate deals relative to other mortgage offerings has also increased significantly.
The attractive deals on offer mean that the possible interest savings, which stand at £1,561 for the first year alone, are perceived to be higher than those with discounted variable rate deals. As a result, borrowers are flocking to take advantage of the savings and spring-clean their finances, following a debt burdened Christmas.
“Borrowers have recognised that, with a base rate cut looking less likely, the fixed rates that are currently on offer are generally more competitive and offer better value than the discounted ones. Although discounted rates are lower, high upfront fees have made them less competitive. As a result, borrowers are moving quickly to secure their repayments.”
