Borrowers wary of rate rises

Grant Bather

June 15, 2006

Mortgages Direct reveals that record numbers of borrowers are opting for long-term fixed rate deals as home-buyers fear that rates will not only rise imminently but increase even further over the next five years.

Mortgages Direct’s monthly survey reveals that number of five year fixed rate loans, comprising of 26% of all mortgages arranged in May, have increased to their highest levels. This is despite a general hardening in the swap rate market and a widespread increase, albeit of only a modest 0.10 to 0.15% so far, in interest rate levels for fixed rate deals in anticipation of a base rate rise later this year.

Although the Bank of England has kept interest rates at 4.5% for ten months now, fixed rate mortgages have been going up in price as many lenders have factored in an increase in their fixed rates in anticipation of a base rate rise later this year. In contrast tracker mortgages, whose rates have stayed static, are more competitive than fixed rate deals. Despite this, Mortgages Direct’s survey reveals that the number of borrowers opting for tracker mortgages has decreased from 14% in April to 8% in May.

Peter Gladdy, Director of Mortgages Direct comments: “With the increasing speculation that interest rates will rise in the imminent future, more borrowers are becoming a lot more cautious. They are not prepared to take the chance that the rates will only increase by the already widely speculated amount of a quarter per cent. They fear further hikes in the forthcoming years. An increasing number of borrowers are weighing up the benefits of cheaper rates against long term security and are currently opting to pay above the odds for long term security. With interest rates in historical terms at inherently modest levels, borrowers are showing little confidence that the rates will remain at this level. Despite the competitive tracker deals currently on offer, borrowers are worried that repayments with a tracker could rise beyond their budget.”

First time buyers level have bounced back to 45% of the market in May, after a temporary blip in April, where first time buyers level was at 33% of the market share.

As well as first time buyers returning to the market, borrowers are also showing signs of improved security in their finances, with 74% opting for repayment mortgages in May compared to 66%.

There has been a slight decrease in buy to let mortgages from 19% to 13% of the market share.

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