Lower fixed rates tempt homeowners

Yorkshire and other lenders launch new deals and see a massive rise in applications
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The Independent Online

Borrowers looking to remortgage to a fixed deal have been given a boost as a host of lenders have lowered their interest rates in the past week. Britannia, Halifax, Nationwide and Abbey have been among the major high street lenders to cut the price of their two-year fixed rate mortgage deals, prompting a surge of interest from homeowners.

"People have been content when their current mortgage deal has come to an end to sit on their lenders' standard variable rate, as they didn't see anything better available on the market. But this has now changed," says David Holmes, spokesman for Yorkshire building society, which cut its two-year fixed mortgage rates by 0.55 per cent on 20 August. "The deals are out there now and people have been rushing to fix their rates as they like the security offered by paying the same amount month in, month out."

But borrowers are not being tempted to fix for very long, choosing two- or three-year terms rather than five or 10. "They don't know what is around the corner and don't want to commit to long fixes," adds Mr Holmes.

Yorkshire says it has seen a doubling in the number of new mortgage applications since it announced its rate cut, a phenomenon that may well have been repeated among other lenders.

Andrew Montlake, director at broker Cobalt Capital, says: "Fixed rate deals have definitely got more attractive, and with all the economic uncertainty and the risk of recession, they provide the answer for many risk-averse people who want certainty."

Mr Montlake's assertion that the cost of a fixed rate has fallen "dramatically" since the height of the summer is borne out by the evidence. According to the financial information group Moneyfacts, the average rate on a two-year fixed mortgage has fallen from 7.08 per cent on 11 July to 6.42 per cent last Friday.

"The conditions in the money markets have eased since mid-July and as a result there is more money in the system to lend and an increased appetite to do so," says Michelle Slade from Moneyfacts.

Mr Montlake reckons that the heads of the UK big banks and building societies have taken a policy decision to loosen their lending but only to customers with good credit histories and large deposits or lots of equity in their home. "The instructions have definitely come from on high that they must improve the quality of their lending book by getting quality residential customers in," he says.

But Mr Montlake believes that even at their new lower levels, fixed rate mortgages may still not be the best buy. "The clever money is still on taking out a tracker mortgage," he says. "As the name suggests, these move in line with the rate set by the Bank of England. Now I don't expect the Bank to cut rates this month, but once inflation peaks we can expect some cuts and this will make tracker rates cheaper."

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