Why Fixed Rate Mortgages May Be Popular For The Wrong Reasons

Why fixed-rate mortgages may be popular for all the wrong reasons There have been a few articles and reports of late about the rise in popularity of fixed rate mortgages. This has been quoted as being down to good fixed rate offers from lenders and borrowers seeking security. All pretty standard huh? I’m not so […]

July 4th, 2018

Why fixed-rate mortgages may be popular for all the wrong reasons

There have been a few articles and reports of late about the rise in popularity of fixed rate mortgages. This has been quoted as being down to good fixed rate offers from lenders and borrowers seeking security. All pretty standard huh?

I’m not so sure the reason for their popularity is quite so simple. There are other reasons which could make the fixed rate mortgage the option to go for which has very little to do with either interest rates or security.

Before I say why it’s worth noting that the number of borrowers who expected an interest rate rise in 2018 has fallen. Ordinarily, this would make you think that borrowers would be more inclined to take the lower variable rate than the higher fixed rate option.

The affordability question

Many lenders, especially in the buy to let sector, assess affordability for any variable-rate borrowing by taking the variable rate and then stressing it to a much higher level. It is this higher level which is then used to judge affordability. The thinking being that ensures the loan is still affordable even if interest rates suddenly jump upwards.

When it comes to fixed rates of five years or more then the lenders will judge affordability based on the fixed rate rather than the stressed variable-rate. Given that the fixed rate is generally lower than the stressed variable it means that affordability can be easier at a fixed rate and the borrower could borrow more money.

Whilst there are no records or proven statistics as to why a borrower would choose a variable or fixed rate it is interesting that we are seeing the popularity of five-year fixed rates increase at a time when affordability assessments are getting ever tighter.

It does make you wonder whether the popularity of five-year fixed rate mortgages is really as simple as many people may think. We’ll see.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.