Fixed rate mortgages fall out of favour

Borrowers are turning away from fixed rate mortgages as their rates remain stubbornly high compared to the Bank of England base rate.

Less than half of new borrowers (42%) chose a fixed rate mortgage in August, according to John Charcol, a leading independent mortgage advisor.  This is the lowest number since December 2008.

In contrast, tracker, discount and standard variable rate mortgages are attracting more customers as their rates reflect the low base rate.

That fixed rate mortgages have more costly than variable rate mortgages, probably indicates that mortgage lenders expect interest rates to rise in the near future.

The government is still supporting Quantitive Easing, however, which may keep base rates low for at least a year, making variable rate mortgages attractive in the short to mid term.

This is echoed by Ray Boulger of John Charcol; “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.”

Mr Boulger does advise caution about the impact of interest rates on the cost of mortgages in the next few years, however:

“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.”