Borrowers flock to fixed-rate mortgage deals

A record number of first-time buyers are flocking to the security of fixed-rate mortgages, amid the prospect of higher borrowing costs, data shows.

LONDON (Reuters) - A record number of first-time buyers are flocking to the security of fixed-rate mortgages, amid the prospect of higher borrowing costs, data shows.

Some 85 percent of first-time buyers chose a fixed-rate deal in January, the highest figure on record, according to the Council of Mortgage Lenders' (CML) monthly survey.

The findings come at a time when mortgage lenders are starting to introduce cheaper fixed rates, on the back of falling swap rates -- the rates lenders use to price their fixed-rate offerings.

Abbey, GMAC, Alliance & Leicester and Bank of Scotland have all announced a reduction in their two-year fixes this week of between 0.10 and 0.15 percentage points.

Overall, fixed-rate mortgages accounted for 72 percent of all new loans in January, the highest proportion since January last year, and up from 69 percent in December.

Just over 70 percent of home movers also decided on a fixed-rate product.

The survey follows a shock quarter-point increase in the base rate to 5.25 percent in January and many analysts expect at least another 0.25 percent rise this year.

CML Director-General Michael Coogan said: "Each month, it seems that the prospect of another interest rate rise is balanced on a knife edge.

"More and more borrowers are protecting themselves against this risk and choosing the certainty of fixing their monthly mortgage payments, which allows them to plan ahead with confidence."

The data shows that the cost of fixed-rate loans remains attractive compared to variable-rate deals.

The average interest rate of a fixed-rate loan in January was 5.27 percent, up from 5.23 percent in December, compared to the average interest rate of a discounted variable-rate product, which climbed to 5.54 percent from 5.36 percent a month earlier.

With swap rates now back down to the level they were in early January, Melanie Bien, a director of independent mortgage broker Savills Private Finance, expected more lenders to reduce their fixes.

"This is excellent news, as the CML figures show that fixed rates continue to be popular, particularly with the threat of a further base rate rise in the second quarter," she said.

Fixed rates are ideal for those on a tight budget -- and there are some good deals to be had.

The best fixed rates with no extended redemption tie-ins include two-year fixes from Bradford & Bingley (4.99 percent) and Cheshire Building Society (5.24 percent) and a three-year loan from the Yorkshire at 5.39 percent.

However, for those who do not need the certainty of set monthly repayments, there are still cheaper trackers available.

For example, BM Solutions, the lending arm of Birmingham Midshires, has a two-year tracker at 0.81 percent under bank base rate for two years, giving a current pay rate of 4.44 percent.