When choosing a mortgage, one of the biggest decisions will be whether you want to opt for a fixed or variable rate product. Well, it seems that fixed rates easily win the day, with research from Paragon Mortgages revealing a clear preference for this type of product.
According to the figures, the majority of borrowers choose fixed rates with this type of mortgage accounting for 77% of intermediary mortgage business. Its popularity has remained consistent over the last year too, while the length of the initial fix is actually on the rise.
Two-year fixed rates have traditionally been the go-to product for most borrowers, however the prospect of rising interest rates means a lot are considering the likes of three and five-year fixes instead – the proportion of five-year fixes has actually risen by 4% since the end of 2013, with them now accounting for 28% of all fixed business.
The trend for fixed rates comes despite the fact that variable rate mortgages tend to be a lot cheaper than their fixed rate counterparts, at least for the initial term. Analysis from Moneyfacts shows that the average two-year fixed mortgage is currently priced at 3.61%, compared to the average two-year variable rate of 2.77%, but as the rate is variable it's subject to change at any time.
If base rate were to increase in the next year, for example, variable rates would be highly likely to follow – meaning there's less certainty of the amount you'll be repaying, which could potentially make it harder to budget. This could well account for the preference of fixed rate mortgages – despite the higher cost, borrowers want to have the certainty that their repayments will stay the same even if rates were to rise in the near future, helping them keep their budget in check for as long as possible.
John Heron, managing director of Paragon Mortgages, explains:
"The continued popularity of fixed rate mortgages is a telling sign that borrowers remain cautious about potential interest rate rises. Fixed rate products provide a measure of security especially as expectation builds of an increase in interest rates… it is encouraging to see a rise in the number of cases of three and five-year fixes [too]. These longer-term products provide borrowers with greater stability and reduce the prospect of payment shock."
Figures from Moneyfacts back up this overall trend, this time showing that there's a shift towards the fixed rate market from lenders as well as individual borrowers.
Last month there were a total of 244 mortgage products withdrawn from the market, a significant sum in itself, but the fact that 194 (or 80%) of those products were variable rate shows the clear preference for fixed rate mortgages. In essence, lenders are pushing consumers towards the fixed market simply by making it the only option, with many removing the possibility of variable rate products altogether.
There's a definite decline in the variable mortgage market, with fixed rates being the go-to choice for the majority of borrowers. If you're one of them you'll want to get the best rate you can, a fact which becomes even more important when you consider that rates are starting to edge up – the average two-year fix has increased by 0.08% in the last month alone – and that means it's time to get on board.
The threat of rising interest rates means you'll want to fix now before things become prohibitive, whether you're a first-time buyer or looking to remortgage, and luckily there are still plenty of great deals to be found. Check out our best buys to find a mortgage that's right for you and keep your repayments as low as possible for as long as you can.
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