Most ex-fixed rate borrowers now paying less than their original mortgage, finds CML

20 October 2011

New research published today by the Council of Mortgage Lenders reveals that around 1.8 million mortgage holders whose fixed rate deals have come to an end are currently on their lender's reversionary variable rate. On average, they are paying around £2,600 a year less than they were under their previous fixed rate deal.

According to the CML's market and data analyst Caroline Purdey, author of the new research, over half of the 1.8 million borrowers now on reverted variable rates have more than 10% equity and could potentially remortgage if they wished to. This seems likely to support remortgage demand as borrowers become more twitchy about future interest rates. For now, however, it seems many borrowers are adopting a "wait and see" approach.

Markets currently expect Bank rate to rise from its current 0.5% to around 0.9% by the end of 2012 and 2% by the end of 2014. Under this scenario, the CML estimates that 85% of those borrowers who have reverted to variable rates would still be paying less than their original mortgage payment by the end of 2012, and around 58% would still be paying less than their original payment throughout 2014.

CML director general Paul Smee comments:

"Most households appear to be able to absorb anticipated interest rate rises over the next few years without seeing the cost of their monthly mortgage payment rise above its original level. Many households have seen a significant windfall from reverting onto variable rates over the past few years, although this will be less true for those coming off short-term fixed rates in the near future.

"The choice of whether or not to fix, and for how long, involves taking a view about the likely direction of future interest rates, along with a personal consideration of how much rate risk is acceptable to a household. Given the economic uncertainty, it is not surprising that for the time being many of those who have reverted onto variable rates and could remortgage are choosing to wait before they decide what to do next."

Housing Minister Grant Shapps is today calling for lenders to offer more long-term fixed-rate mortgages to the market. The CML believes such products can be attractive to some borrowers, but points to two pieces of research that it published in December 2007 that explained long-term fixed rate mortgages, and showed why consumers are cautious about entering into them.

Consumers tend to be concerned in case subsequent interest rate movements mean that the deal looks unattractive after they have entered into it, in which case they either have to live with the fact that their mortgage is less attractive than prevailing rates, or pay an exit fee to redeem it early and remortgage. One way around this would be to factor in the cost of "pre-payment" to the headline rate so that exit fees are minimised. This would typically add at least 0.5% to the headline mortgage rate, and there is little evidence that UK consumers are prepared to pay this level of premium for the unquestionable benefits of certainty that a long-term fixed rate would provide.

However, market conditions have changed since 2007 and attitudes can be fluid. If there is a greater appetite to seek long-term relationships of value, rather than short-term deals predicated on regular remortgaging, lenders will undoubtedly respond, and the CML will be keeping the issue of long-term fixed rates under review.

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