Fixed rates become a minority choice

The monthly mortgage activity monitor from John Charcolshows that less than half of borrowers (41.9%) chose a fixed rate in August, the lowest number since December last year.

"Following the MPC's decision in August to extend the Quantitative Easing programme, plus subsequent comments from Mervyn King, it increasingly looks as if interest rates will remain low for at least 2 - 3 years on the back of a very slow economic recovery." commented Ray Boulger of John Charcol.

"Taking this into account we have continued to advise an increasing proportion of our clients to take a variable rate mortgage, as the differential between fixed and variable rate pricing is now such that fixed rates appear to be discounting the rise in interest rates which will eventually happen too much, too quickly."

The John Charcol Index shows that the reduction in take up of fixed rates has not only been restricted to individual cases; the volume of lending has fallen even further, to only 35.6% of the total, clearly indicating that borrowers taking larger mortgages were particularly attracted by variable rates. Indications so far this month are that the proportion of clients choosing a fixed rate is now stabilising.

Boulger continued, "Nearly 10% of our clients choosing a variable rate went for a discount off SVR rather than a tracker, reflecting in part some very cheap discounts but also our revised view on the relative merits between tracker and discount rates. With most SVR rates now between 4% and 6%, and the most expensive at 6.45%, the spread above Bank Rate is so large that it is now more likely to narrow than widen from here. It will narrow either when funding for the mortgage market improves, thus increasing competition, or when Bank Rate rises significantly. Neither of these is likely to happen to such an extent that the difference between SVR rates and Bank Rate narrows in the near future but discounts are now likely to perform at least as well as trackers, and in some cases better over the medium term."