Variable rate mortgages becoming popular

Consumers are increasingly being drawn to variable rate mortgage products as fixed rate loans fall out of favour, according to new data from a consumer website.

Tracker and discounted rate deals appear to be more lucrative in the current low-rate environment, search traffic figures released by moneysupermarket.com show.

Fixed-rate mortgages were in demand before the financial woes begun but their popularity was quickly capped by the successive cuts in the Bank of England Base Rate towards the end of last year.

Inquiries for fixed-rate mortgage deals made up 35 per cent of all mortgage searches at moneysupermarket.com in 2008, but by the beginning of 2009 the figure had declined to just 28 per cent.

Despite a slight surge in interest in fixed-rate mortgages in the first half of 2009 as consumers tried to guard against a possible hike in interest rates, searches for the products are falling again and currently make up just 29 per cent of total enquiries on the site.

According to moneysupermarket.com mortgage spokesperson Hannah-Mercedes Skenfield, tracker and discounted deals appear lucrative to borrowers because they believe the Base Rate will not be rising any time soon.

"This appeal is likely to last as long as the Base Rate remains low and lenders such as HSBC and First Direct continue to offer headline rates on their discount and tracker mortgages," she explained.

"Variable rate deals look very attractive now, but with a widening gap between average tracker prices and the Base Rate most are now priced so high above the Base Rate that if the Bank of England starts to raise rates again many borrowers could be left paying eye-wateringly expensive repayments."

Meanwhile first-time buyers could find it easier to secure loans as lenders lower the capital required to secure house purchase loans.

According to Mortgageforce, the average deposit demanded by lenders has been dropping in recent months and first-time buyers are now required to cough up only 21.25 per cent, compared to 25.4 per cent in July and 28.6 per cent in June.

The low deposit requirements are also accompanied by good deals such HSBC's, which offers a 3.89 per cent discount for two years for a £1,199 fee for those borrowing 90 per cent of a property's value.

Katie Tucker, technical manager at Mortgageforce, commented: "More generous deals are available; the ongoing stability of house prices reduces the risk of negative equity and repossessions that lenders are keen to avoid, so we should see more accommodating terms from them now."

However, she warned that "although tracker and discount rates are looking very low currently, first-time owners or anyone on a restricted budget should consider very carefully whether they could continue to afford their mortgage payments if that rate does increase by a few per cent".