According to recent figures, published by the Council of Mortgage Lenders (CML), demand for fixed rate mortgages has risen to a record high.
The CML’s figures reveal 83% of new mortgages, taken out in the first quarter of this year, were on a fixed rate; the highest proportion since records began in 1993. The increase in the number of fixed rate mortgages being taken out is part of an on-going trend. 10 years ago only 19% of new mortgages were of this type, whilst last year 69% were arranged on a fixed rate.
Mortgage experts believe the recent burst in demand for fixed rates isn’t because of immediate fears the Bank of England will raise interest rates. But has more due the falling cost of fixed rate mortgages, principally driven down by the government’s Funding for Lending Scheme (FLS).
Tracker mortgages follow Bank of England base rate with an additional margin added on top to create the actual rate payable.
When the financial crisis hit, during 2008, the Bank of England’s Monetary Policy Committee reduced base rate to 0.5%, where is has remained ever since. Since 2008 various predictions have been made regarding base rate. Last year, it was suggested that a rise could have been expected in 2013 or 2014; however, most experts now believe any rate rise is unlikely in the short term and perhaps not before 2016.
Over the past decade, tracker mortgages had been extremely popular, although the use of fixed rate loans has been on the rise, to a point where they now dominate the market.
Most mortgage experts believe the rise in popularity of fixed rate mortgages, at the expense of trackers, has been due to a number of factors:
- A desire from many homebuyers, especially first time buyers, to be able to budget more easily. A fixed rate mortgage means the interest rate cannot be changed for a set number of years, making it easier to budget with more certainty
- The Funding for Lending Scheme has significantly brought down the cost of fixed rate mortgages since its introduction in August 2012
- Some borrowers may have been put off variable rate mortgages following moves by a number of banks to increase their Standard Variable Rate. Others, such as the Bank of Ireland, have increased the margin on their tracker mortgages, pushing up monthly mortgage payments despite base rate remaining unchanged
The Funding for Lending Scheme (FLS) was introduced last summer and experts believe this is likely to be one of the key reasons behind the surge in popularity of fixed rate mortgages.
The scheme, which was was launched by the Bank of England and has also received government backing, aims to boost to the mortgage market by reducing the cost of mortgages and making them more available to certain groups of borrowers. But has also had a knock on effect on savings interest rates.
Around £80 billion is available to banks and building societies to borrow at a cheap rate, as low as 0.25%, which allows interest rates charged to borrowers to be reduced. However, it also lessens the requirement for banks to attract custom through savings accounts. This has allowed banks and building societies to push interest rates down on their best buy savings accounts, causing hardship to savers who have also been hit by low interest rates.
In the opinion of many financial experts, the damage to savers will need addressing before it becomes irreparable.
Number of first time buyers on the rise
The number of mortgages advanced to first time buyers increased by 20% over the past two months.
In recently published figures, again produced by the CML, first timers made up almost half of the total house purchases for the first quarter of this year.
It was also revealed that gross lending increased between March and April by 4%, taking the total mortgage advances last month to £12.1 billion.
Bob Pannell, Chief Economist at the CML, said: “Our forward estimate is that gross lending in April was £12.1 billion. This would have been 4% up on March. The comparison with April last year – 21% higher – is flattered by the temporary dearth of house buying activity immediately following the closure of the stamp duty concession.”
Pannel continued: “The true underlying position is that April is likely to have been one of the strongest months for lending activity since late 2008, but not as strong as the year-earlier comparison suggests. Gross lending on a seasonally adjusted basis has been running comfortably above £12 billion for several months, but this is still barely half the average level of lending seen in 2003-4.”