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Borrowers choosing fixed rate mortgages

Borrowers choosing fixed rate mortgages

Category: Mortgages

Updated: 26/03/2014
First Published: 26/03/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

It's always nice to have some security when it comes to monthly outgoings, and that could explain why a record number of homeowners – more than 19 out of every 20, in fact – are choosing fixed rate mortgages instead of their variable rate counterparts.

Latest research from the Mortgage Advice Bureau (MAB) has revealed that 96% of buyers opted for fixed rates in February, easily beating the previous record of 94% set in both December and January. Perhaps unsurprisingly, this is largely thought to be the result of average rates slowly increasing - Moneyfacts figures revealed that both two and five-year fixed rates rose in February, reaching 3.50% and 4.02% respectively, with five-year rates having been on an upwards trajectory since August last year.

MAB research also revealed that activity in the housing market is on a definite increase. Purchase applications were up 33% from January's total and posted a year-on-year rise of 62%, while remortgage applications have also risen, albeit to a lesser extent, posting a monthly increase of 16% and an annual rise of 49%.

"A rise in Bank of England base rate is constantly on the mind of borrowers, which would explain the preference for fixed rate products", said Sylvia Waycot, editor of Moneyfacts.co.uk. "Because of this activity, rates have risen over recent months which will further fuel desire to get - and fix - the best rate as soon as possible," she added.

With increasing rates and the prospect of a base rate increase it's no wonder so many people are choosing fixed rate mortgages, but the ongoing impact of rising house prices could be having an impact too.

Prices are increasing rapidly which could perhaps explain the increased level of activity in the sector – people want to get on (or move up) the ladder before prices become too prohibitive, because of course, the higher the price the bigger the mortgage, and the higher the monthly repayments will be.

Latest figures from the Office for National Statistics (ONS) highlight how quickly prices are rising. In January this year, the average UK property would set you back £254,000 – that's a 6.8% increase on the same time last year, and even a 5.5% rise compared to December's total.

As might be expected, this was largely fuelled by prices in London which rose by 13.2% year-on-year, which has helped drive England prices 4.4% higher than they were at the pre-crisis peak of January 2008 (prices in Scotland, Wales and Northern Ireland are still lower, however). Excluding Londonand the South East, UK house prices rose by a slightly more modest 3.8% over the year to January.

The figures also revealed that first-time buyers paid, on average, 7.6% more than they did the year previously (reaching £190,000), while for existing owners prices increased by 6.5% over the same period to hit £291,000. Doesn't it make sense, then, to get on the housing ladder – and fix your mortgage – sooner rather than later? Check out the best rates to keep your repayments as low as possible.

It's especially important to consider given that experts are suggesting the only way to curb the onslaught of rising prices is to rectify the supply/demand imbalance. Currently there are too few properties available in the market to accommodate the number of buyers, and that increased competition is ramping up prices.

Ideally, the success of the Government's Help to Buy scheme should encourage more new homes being built, thereby ensuring more people can take advantage of the equity loan element of the scheme. As it stands, however, the level of house building is falling woefully short of expectations.

In fact, latest figures from the House Builders Federation (HFB) suggest that Britain is currently facing a shortage of some 1 million homes. This is based on the fact that a housing supply review (conducted in 2004) said that the UK needed 210,000 private homes to be built per year to avoid a housing crisis, but over the past decade just 115,000 have been built, on average, each year.

The HBF calls it the "lost decade" of house building, and has said that to reduce the long-term trend of house price inflation the UK would now need to build 260,000 homes per year, while an even more ambitious target of reducing price inflation to 1.1% (as suggested in the previous review) would require 320,000 new homes per year.

These figures could well be difficult to achieve in the foreseeable future, but it's hoped that the Government's focus on new build homes – and the commitment to extend the equity loan element of Help to Buy to 2020, rather than 2016 as initially planned – could boost levels of house building to at least get some way close.

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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