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Variable mortgages sidelined in favour of fixed

Variable mortgages sidelined in favour of fixed

Category: Mortgages

Updated: 29/10/2014
First Published: 29/10/2014

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 It is now over 6 months old so the content may be out of date.

There's been a huge amount of competition in the mortgage market of late. Research from Moneyfacts shows that this is down to the market undergoing a period of intense preparation, with providers looking to improve their offerings ahead of a base rate change – and it's fixed rates that are becoming increasingly dominant.

Fixed rates have fallen dramatically in the last few months, with Moneyfacts' figures revealing that the average two-year fixed rate mortgage has dropped by a significant 0.25% in the last two months alone, now standing at 3.27% – a clear reduction from the 3.52% recorded in August.

But just why are providers reducing rates so considerably? Well, it's all down to base rate. Since it fell to its historic low of 0.5% in March 2008, many borrowers exiting a fixed rate have found it cheaper to remain on their lender's standard variable rate (SVR) rather than take on a new, and often more expensive, fixed rate mortgage.

Figures from the Council of Mortgage Lenders (CML) show that as much as 67% of today's mortgages are on SVR, highlighting the reluctance to switch. However, because borrowers on these variable rates aren't tied to their mortgage, a large portion of the market could change mortgage provider at any time – and it's got providers worried.

Lenders must protect their mortgage books and are therefore concerned that when base rate rises – and with it SVRs – borrowers will look for better deals from competitors' fixed rates.

Consequently, the battle to own the fixed rate mortgage market has begun. This, then, is the reason behind such dramatic rate cuts, but the pressure can also be seen from another angle – product availability.

Alongside falling fixed rates, product choice is on the rise, another indication of the importance lenders are putting on retaining customers. The number of fixed rate mortgages on offer has risen by 297 since September, while in the variable market, products have only risen by 10 – indicating that lenders are reluctant to add to a variable book that doesn't lock borrowers in.

Clearly, the focus is squarely on preparation in the hope that when borrowers do look to remortgage, they'll head for a low fixed rate product offered by their current provider.

Sylvia Waycot, editor at, said:

"The remortgage market will witness a considerable boost in activity when base rate changes. Many borrowers will look for a fixed rate to shelter from further increases, and many will look at starting a new relationship with another lender.

"This is what is driving lenders to start planning now to protect their lending books and their market share by enticing their SVR borrowers to stay put.

"Rates are being cut considerably, and in many cases, lenders have made more changes in recent months than they have done in the last few years. They're getting ready for the inevitable increase to base rate by ensuring their fixed mortgages look attractive when borrowers want to move.

"Fixed rates are becoming increasingly dominant and, as a result, increasingly lower-priced, as lenders strive to be seen as offering the best rates. This level of activity is anticipated to continue as the prospect of an increase to base rate looms, with such intense competition potentially fuelling further fixed rate reductions as the market readies itself."

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