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Fixed Rates and Remortgaging

False Dawn?

With the prospect of base rate increases seemingly drawing nearer, fixed rate mortgages should help many households avoid the immediate pain (assuming that any increases are passed through to mortgage rates). Most new mortgages in the UK (88% by number and 81% by value) have a fixed rate period and this has raised the proportion of outstanding mortgage debt on a fixed rate from 32% in 2012 to 49% in the second quarter of 2015. With hindsight, it is worth noting that mortgage rates have followed a downward trend during the same period and so the benefit of a fixed rate may have been piece of mind rather than financial. However, there are now tentative signs that mortgage rates have bottomed out.

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Data on the actual length of fixed rate periods is limited (let me know if I’ve missed it), so to estimate this I’ve used data on average mortgage rates for all fixed lending compared to the average rate for different fixed periods. For both new lending and outstanding lending (as per the charts below), the overlap suggests that most mortgages are fixed for a period of five years or less. At a guess, the average is probably closer to two years. That means many recent borrowers are likely to exit their fixed rate period into a market with rising interest rates and tougher lending criteria. That could cause problems for some borrowers and particularly if their mortgage was arranged prior to the introduction of the Mortgage Market Review rules…

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