CML: Fixed-rate mortgage in decline

Tracker-rate mortgages have continued to increase their popularity, with the prospect of further Bank of England base-rate cuts looming on the horizon.

According to research from the Council of Mortgage Lenders (CML) just 52 per cent of borrowers selected fixed-rate mortgages in February – the lowest level since March 2005.

In contrast, the proportion of borrowers choosing tracker-rate loans increased to 35 per cent. This is up from 33 per cent in January, and from 14 per cent in February 2007.

The findings seem to contradict reports from Abbey, released yesterday, which claim a boom in five-year fixed-rate deals is imminent five-year fixed-rate deals is imminent.

However, the CML argues the figures relate to decisions taken several months ago, and thus do not consider the shrinking range of products available on the market at present.

"More recently, there has been consistent evidence of tightening in lending criteria which will lead to shrinking pipelines of new business as the recent Bank of England's credit condition survey made clear," said CML director general, Michael Coogan.

"We expect this process of further tightening in lending criteria to continue in the second quarter as lenders respond to the challenging market conditions."

It is thought the reversal in the competing products' popularity is based on expectations of a further cut in the base rate of interest in coming months.

The Bank of England has cut rates twice recently, by 0.25 per cent in December and February - to a level of 5.25 per cent.

The Bank's monetary policy committee (MPC) will meet this week to decide the future direction of rates, with a decision expected on Thursday.

The change toward variable rate products is justified explains the Royal Institution of Chartered Surveyors (Rics).

"The shift towards variable rate loans is wholly understandable given the shifting perception of interest rate expectations," said Simon Rubinsohn, Rics chief economist.

Rics expects base rates to fall to at least 4.5 per cent over the coming months - increasing the incentive to look where possible for tracker-style loans.

However, borrowers are being advised to consider more than interest rates when purchasing a mortgage.

“However, low interest rates do not guarantee good mortgage deals - variable or otherwise. Affordability will not increase until something is done by the Bank of England to increase liquidity levels to ensure that the demand for consumer borrowing is met," said Steve Cox, operations director of Spicerhaart Financial Services.

"The situation also means it is essential borrowers do their research. Products continue to be withdrawn and replaced at pace, and consumers must seek independent mortgage advice, and move quickly, to secure the most suitable deals."

According to the CML, first-time buyers typically borrowed 88 per cent of the value of a property in February – a figure unchanged from January.

Furthermore, this group borrowed 3.33 times their income, compared with 3.32 in January.

Home movers typically borrowed 71 per cent of the property's value, up from 70 per cent in January, and 2.97 times their income, unchanged from January.

In terms of the market as a whole, gross lending totalled £25 billion in February - down 3.5 per cent from January and 2.3 per cent from February last year.

Loans for house purchase also declined in volume, down 3.5 per cent from January to 49,000.

The CML finds the number of loans for house purchase has been more than 30 per cent lower than a year ago for the last three months, and this picture of year-on-year declines will likely continue throughout 2008.

However, remortgaging made up 45 per cent of all lending in February, this is unchanged from January and the highest share since March 2005.

"Individual lenders are having to balance consumer demand with service considerations, as many of those active in the market are seeing higher levels of applications than they can deal with in the wake of the overall tightening in supply of funding to the market," explained Mr Coogan.

In recent weeks, Direct Line and Scottish Widows have closed to new business, while others have curtailed their offering.