Appetite for variable rates on the rise

Appetite for variable rates on the rise

As the chances of an imminent interest rate rise from the Bank of England have fallen away, more mortgage borrowers to opt for variable rates during February than any month since November 2012, according to the National Mortgage Index from Mortgage Advice Bureau (MAB).

10.1% of homebuyers and remortgaging homeowners chose variable rates in February, up from 8.6% in January to the highest percentage in over two years (27 months). Borrowers remortgaging to a new deal were the most likely to apply for variable products in February, with 12.8% doing so compared with 9.0% of homebuyers.

The popularity of variable rates among all applicants peaked at 58.0% in December 2009, nine months after the Bank of England first set the base rate at 0.5%.

Appetite for variable rates then steadily fell over the next three years to the extent that, since December 2012, fewer than one in ten borrowers have made this choice, dropping to just 5.8% in December 2013: a record low under the 0.5% base rate.

However, falling inflation prompted the Bank of England to suggest in its February 2015 Inflation Report that interest rates will not rise until spring 2016 if the UK economy stays on its current path. MAB said this appears to have reassured some borrowers and prompted more to take advantage of the low rates available on many variable as well as fixed rate products.

The Index also shows total mortgage product numbers reached a new post-recession high of 12,940 in February, surpassing the previous record of 12,925 from December 2014 as lenders continue to compete for business.

An 18% annual increase in product numbers meant that, compared with February 2014, there were 1,999 more mortgage products available last month for borrowers to choose from. The majority of these extra products (74%) were available via intermediaries, with almost three new intermediary products having emerged over the last year for every new direct product (1,472 vs. 527).

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “Just six months ago it seemed that that low interest rates were experiencing a last hurrah. But with inflation also at record lows, the 0.5% base rate has sailed past its sixth anniversary unscathed and is continuing to tempt lenders into offering attractively priced deals. Product numbers continue to rise and changes in the market over the last year mean that lenders are increasingly leaning on brokers to match their products to suitable borrowers.

“While fixed rates remain the majority preference as people put their finances on a stable footing, it is no surprise that the lower rates available on some variable deals are attracting more interest. Comments from the Bank of England have clearly inspired confidence that low rates are here to stay for the foreseeable future. Some homeowners and buyers may feel there is still a window to make a short term saving through cheaper variable rates, and then lock in at a later date around the time of the first rise.”

Data for the first two months of 2015 shows borrowers in Wales, the North West and East Anglia are the most likely to prefer fixed rates. Those in London, the East Midlands and the South West are the most likely to choose variable deals.

MAB said that Yorkshire and Humberside is unusual in that it is the only region where buyers are more likely to choose variable rates than remortgaging owners (9.7% vs. 6.8%). The North West is the only region where both groups are fully in sync, with 6.3% of borrowers opting for variable rates so far this year whether they are buying a house or remortgaging.

Murphy added: “Homeowners and buyers in London often have more spending power behind them, which can give them extra confidence to seek a saving through cheaper variable deals and accept the chance that rates may rise and negate the benefits.

“Even though homeowners in Wales borrow significantly less [£85,961 for the average remortgage loan during February compared with £333,044 in London], they typically put more emphasis on the security of knowing their repayments will not change from one month to the next – even if it means paying a slightly higher price to begin with.”