Fixed rate mortgages

Fixed-rate mortgages are now back on the political agenda, following a series of announcements last week by
the government. We look forward to seeing more details of its plans for covered bond legislation and a review
of wholesale funding. At this stage, it is too early to say whether announcements about funding will eventually
produce a significant shift in the future design of mortgage products. Even if that can be delivered, consumer
appetite for long-term fixed-rate mortgages will be a key – and perhaps the decisive – factor in determining their
take-up. We have, however, consistently argued that current housing affordability problems are rooted in a
shortage of supply of homes. So we welcome the government’s announcement of its desire to raise housebuilding
rates, while recognising that the targets are challenging. On behalf of lenders, we will be discussing all
the relevant issues in more detail with the government.
A couple of days before last week’s formal announcements about mortgage funding by Gordon Brown and the
Treasury, the new chancellor Alistair Darling had set out the government’s concerns about consumer
preferences for short-term fixed-rate mortgages in an interview published in The Guardian. The chancellor
argued that short-term fixed-rate borrowing brought “volatility” to the mortgage market. He also said that he
was concerned about the arrangement fees paid by borrowers for some short-term fixed-rate products.
In his interview with The Guardian, Mr Darling said: “There has been a big expansion in fixed-rate mortgages
over the last two or three years, but they have all been short term, for a period of two or three years. When you
look around the rest of Europe, it is more common to have longer-term fixed rates. We need to look at that.
We need to reduce the volatility.” He continued: “Brokers want you to come back every two years, rather than
every 10 or 20. The Financial Services Authority has identified this as a problem.”
Fixed-rate mortgages
On the same day that Mr Darling’s interview was published, we released data from our own regulated mortgage
survey (RMS) confirming what the chancellor had told The Guardian about the current popularity of fixed-rate
borrowing. Our data showed that 89% of first-time buyers took out a fixed-rate mortgages in May – equalling the
highest proportion ever recorded. Among home movers, fixed-rate loans were almost as popular, chosen by
73%. Looking at all borrowing in May – for remortgaging, as well as for house purchase – 78% of loans were
taken at fixed rates, equalling the highest proportion on record.
Our data also confirmed what the chancellor had told The Guardian about the growth in popularity – over the
last two or three years – of borrowing at fixed rates. In May 2005, only 56% of loans were taken out at a fixed
rate. The growth in demand for fixed-rate loans over the last two years has been mirrored by a decline in the
popularity of discounted mortgages. In May this year, only 5% of loans were taken out at discounted rates,
compared with 18% in May 2005.
Long-term – or short?
We have been able to analyse the RMS data to provide more information about borrowers’ preferences for
long- and short-term fixed-rate mortgages. In recent months, around 40% of borrowers taking out a fixed-rate
deal have been opting for a term of up to two years. The proportion taking out a fixed-rate loan for two to three
years has been approaching 30%. A little more than 20% have been choosing to fix their rate for three to five
years. And around 10% have been taking out a loan with a rate fixed for five years or more.