Borrowers are ignoring discount deals and opting for more expensive fixed rates due to fears over possible interest rate rises.
According to Charcol, rates on discount deals are on average around 1% lower than the cheapest fixed deals. But advisers are finding clients are still choosing fixed deals, despite the cheap discount deals on offer.
Andy Frankish, business development manager at Rotherham-based advisers Mortgage Talk, said: ‘Borrowers are aware of rates and although some clients still opt for the cheapest initial cost option, more seem to be opting for fixed rates because they believe rates will increase. The problem with fixed rates is they often have more up-front fees and longer tie-ins with large redemption penalties. Clients have to look at long-term costs and discounts prove cheaper if you compare them with fixed rates over the long term,’ he said.
Rob Clifford, managing director of Nottingham-based Mortgageforce, has experienced a similar trend.
‘For the past six months we have found over 70% of first-time buyers have been selecting fixes even though the climate has been favouring discounts. In the first quarter of 2002, 60% of all clients opted for fixes ‘ which shows how anxious people are about interest rates moving. For those on a tight budget, fixes can still offer the best deal, but people who are not stretching themselves should be able to tolerate a change in rate with a discount deal. Around eight out of 10 of the cheapest deals are now discounts,’ he said.
According to Charcol, two-year fixes currently start at 4.5%, whereas discount deals with no tie-ins start at just 3.5%.
Ray Boulger, senior technical manager at Charcol, said: ‘There will always be some people that prefer the security of a fixed rate and cannot risk interest rates going up. However, discounts do offer good value. Many people remain nervous about rates, especially if they were caught out in the last recession. But we are in a low-inflation, low-interest environment and there is less of a need to protect yourself against rate increases, as they will be less volatile.’