Death of fixed-rate mortgages?

Wednesday, 13 February 2008 12:00 AM

The number of homebuyers taking out fixed-rate mortgages has seen a dramatic decrease over the past 12 months, according to research from brokers John Charcol.

Fixed-rate deals accounted for some 69 per cent of the market at the start of 2007 - following sustained interest rate increased by the Bank of England - as consumers attempted to insulate themselves from further rises.

However, the figure fell to just 33 per cent in January 2008 - as consumers reversed their considerations and opted for variable products to take advantage of potential cuts in the base rate.

The findings match those of Andrew Mortgages Services, which reports 35 per cent of customers are now taking out track mortgages in January - up eight per cent on the previous month.

"Tracker products proved to be flavor of the month in January with over a third (35 per cent) of new borrowers arranging mortgages on this basis," said Chris Chapman, director of Andrews Mortgage Services.

The Bank of England monetary policy committee (MPC) made two 0.25 per cent cuts to interest rates in December and February - with further cuts also widely expected.

The findings form part of the inaugural Charcol mortgage monitor, which the broker has designed to give insight into market trends and the habits of buyers and remortgagers.

Charcol also finds the number of interest-only mortgages is in decline.

While 49 per cent of all mortgages taken out were interest-only during the period of high interest rates in 2007, this fell back to 40 per cent in January 2008.

Few borrowers chose to extend their mortgage terms however, the average term remained at 21 years throughout.

"It is vital now that the borrowers who went interest-only to help their affordability in 2006 or 2007 revert back to capital repayment, or overpay accordingly, as interest rates have started to reduce," explained Katie Tucker, of John Charcol.

The research also finds the average income multiple employed on a mortgage is 3.11 - with this rising to 3.5 among first-time buyers.

"Interestingly, a multiple in excess of 3.5 is cited by the FSA as one of the three reasons your mortgage could be considered 'high-risk'.

"Borrowers would really do wisely to pay more where possible to reduce their debt this year," continued Ms Tucker.

The Charcol mortgage monitor also finds the average age of a first-time property buyer is now 33.5 years of age.

"From the data gathered only in January, it's already obvious first-time buyers are going to be the group to watch in 2008," concluded Ms Tucker.

Affordability is key here, as most lenders calculate loan amounts now based on monthly repayments on a realistic interest rate, instead of multiples.

"This means, as interest rates have risen, the monthly payments have increased, resulting in a lower loan amount to income ratio."

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