Fixed-rate mortgages on the rise as homeowners play it safe

By Joel Stanier

More than two thirds of homeowners are now opting for fixed-rate mortgages in order to protect themselves against potential interest rate rises, according to independent mortgage broker John Charcol.

69% of John Charcol clients chose a fixed-rate mortgage in October. 5% chose a 3-year fix, with the remaining 64% split evenly between 2-year and 5-year deals.

This comes despite the fact that tracker mortgages are typically much cheaper in terms of interest. Rates on tracker deals increase in line with the Bank of England's base rate - but with the base rate unlikely to rise anytime soon, fixed-rate homeowners could be paying more than they need to.

In fact, latest market predictions suggest that the base rate might not rise above the current level until February 2017 - and we could actually see a further cut in interest rates before we see a rise.

So the popularity of fixed-rate mortgages may suggest that people are happy to play it safe when it comes to their finances, despite the better rates available on tracker deals. The fact that many lenders are cutting fixed rates will have also helped.

Ray Boulger, an expert adviser at John Charcol, said: "The steady stream of rate cuts gathered pace over the month, mostly on fixed-rate mortgages. In the last week only one major lender, Woolwich, has moved rates in the opposite direction, as well as reducing its product range; this was no doubt to reduce demand in order to address service issues."

He also suggested that mortgage providers should be encouraged to offer longer fixed deals at affordable rates, to help ensure that fewer homeowners get into trouble with their payments in the future. He said the Bank of England could encourage this in the second round of the Funding for Lending Scheme (FLS), in which it has already made millions of pounds available to banks for the purpose of lending.

He said: "By offering a longer term fix, say 7-10 years, at today's low rates the risk of borrowers defaulting as a result of an increase in interest rates would be negated. In addition, as all these mortgages would have to be on a repayment basis the LTV at the end of the fixed rate period would have fallen far enough to mean that the risk of loss to the lender at that stage was very small."

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