Homebuyers rush to lock into cheap fixed-rate mortgages

Fixed-rate mortgages made up half of all new loans taken out last month for the first time in four years, as homebuyers rushed to lock into cheap rates. The Council of Mortgage Lenders said the share of fixed-rate deals had doubled over the last year as their interest rates tumbled much faster than variable mortgages.

However, there was little sign this was the start of a move towards long fixed-rate lending that the Treasury believes is a precondition for British entry into the euro.

Michael Coogan, the CML's director general, said: "It is unlikely the market can deliver long-term, fixed-rate mortgage products that are attractive to UK consumers, as the Chancellor of the Exchequer has advocated, without the introduction of significant government incentives to encourage borrowers to take them."

Instead, the boom in fixed-rate deals was driven by the price-sensitive volatility Gordon Brown believes makes the UK different structurally from the eurozone. The CML said the shift reflected the fall in the average rate from 5.25 per cent in May last year to 4.21 per cent last month. This covered a period in which the Bank of England cut the base rate once, which was reflected in the fall in the variable rate from 4.4 to 4.1 per cent.

The number of fixed-rate loans has surged from 65,000 a year ago to 119,000 last month while variable-rate mortgages have fallen in number to 50,000 from 73,000 over the same period. "A reduction in the price of short-term fixed rate mortgages is being helped by expectations of interest rate reductions," Mr Coogan said. "This clearly shows the price sensitivity of UK consumers, and that borrowers will opt for fixed-rate products if they are competitive."

In his April Budget the Chancellor commissioned Professor David Miles, a housing expert at Imperial College London, to investigate why long-term mortgages take up such a low share of total business.

Just 5 per cent of British mortgages are on long-term fixed rates compared with 80 per cent in Germany and 65 per cent in Holland. The Treasury believes this creates a much stronger link between house prices and changes in interest rates, and total consumption in the economy.

Meanwhile the number of mortgages taken out by first time buyers slumped to 30 per cent, the CML said. This was equal to the record hit in January and further evidence that young buyers are being priced out of the market.

Separately, data from the British Bankers' Association yesterday revealed underlying mortgage lending rose by £64.bn last month. Credit card lending, however, increased by about £500m. Philip Shaw, the chief economist at Investec said: "The building societies data suggest that the housing market held its own in May but the strong approvals number may be a market share phenomenon."