Homebuyers rush to fix rates

Concerns about interest rate rises and increases in the number of repossessions drove higher sales of fixed-rate mortgages in the last three months of 2005, figures showed today.

The Council of Mortgage lenders said the popularity of fixed rate deals appeared to have increased dramatically over the year, with three-quarters of home loans (76%) taken out between October and December fixed-rate deals.

This was up from 68% in the third quarter and 56% in the second quarter of the year.

The remaining new mortgages were variable rate deals - 8% were discount deals, 12% tracker mortgages and the rest capped or on lenders' standard variable rates.

Michael Coogan, the CML's director general, said the rise in the popularity of fixed-rate products was "striking".

"The combination of interest rate rises in recent years with modest increases in arrears and possessions, have alerted people to the long-term security of fixed-rate products," he said.

"This is encouraging as it shows people are planning ahead to avoid financial difficulty should rates rise in the future."

Ray Boulger, senior technical manager at mortgage broker John Charcol, said this did not reflect his customers' choices.

However, he said a lot of borrowers, particularly those who were not taking advice from a broker, valued the stability offered by a fixed-rate mortgage.

"A lot of people do feel very comfortable with a fixed rate providing they aren't going to pay a premium for it. When fixed rates are at or below the cost of trackers, that's when you will tend to see them rise in popularity.

"The kind of mortgage market we have had over the past year has been conducive for that."

A look at the best buy tables from last October reveals that borrowers would pay less for the top two-year fixed-rate deal than if they opted for a variable rate, and at the end of the year the best buys for both types of loan were around 4.20%.

The CML figures also show borrowers exercising caution about repaying their mortgage, with 74% of first-time buyers and 66% of movers opting for repayment mortgages, and just 15% of first-timers going for interest-only deals.

In total, the CML said 591,300 new mortgages had been taken out over the three months to the end of the year, up from 572,400 in the previous quarter.

First-time buyers took out 38% of the loans used to purchase a property, typically borrowing 90% of the cost of a property. The average first-time buyer loan was up 5% on the second quarter at £103,000.

Mortgages taken out by this group average around 3.1 times their salary - slightly more than earlier in the year - but the proportion of income spent on monthly repayments was down at 15.9%.