Mortgage borrowers switching to variable rates

by Ed Bowsher on 26 February 2010  |  0 comments
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A rising percentage of mortgage borrowers are going for variable rate mortgages. This is a risky move.

Nationwide Building Society said this morning that there has been a steady switch towards variable rate mortgages over the last six months or so. Back in July, only 14% of new mortgage loans were base rate trackers or discounted variable rate products. But by December that number had risen to 39%. 

So why have variable rate mortgages become more popular? 

Nationwide offers two possible explanations. Firstly, borrowers in 2010 may believe that the base rate will remain low for longer than they did last summer.  

Another possibility is that as house prices rose, new borrowers opted for cheap variable deals because they needed to keep monthly repayments as low as possible. As Nationwide says: 

“There is currently a 1.58 percentage point gap between fixed and variable rate deals. This difference is largely due to the steepness of the UK yield curve, with rates on longer term government bonds much higher than those on short-term borrowing.” 

I suspect that both explanations have played a role here but the more important point is this: are new borrowers right to go for variable deals? 

Well, I think it’s true to say that the base rate probably will stay low for at least the next year or so. So if you went for a tracker mortgage now you probably won’t be caught out in the near future. What’s more, long-term interest rates are much higher and that’s keeping 5-year fixed rate deals at much higher rates than short-term trackers. 

But the risk is that short-term rates could kick upwards in 2011 or 12. So if you take out a tracker now, you need to be very confident that you could cope with significantly higher monthly payments in a couple of years’ time. If I was taking out a mortgage now, I’d go for a fixed, probably for five years.  

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends.