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Interest Only v Fixed Rate Mortgages

Interest only mortgage deals have declined to 23% of all mortgages sold between July and September 2008 according to a survey of more than 200 financial advisers conducted by Paragon Mortgage. The comparable figure for the first quarter of 2008 was 26%, which was down from the last quarter of 2007. The last time that interest only mortgages fell before this quarter was in the first three months of 2004.

On the other hand repayment mortgages have shown a rise following years of decline. They made up 60% of mortgages sold in the third quarter. The proportion of repayment mortgages has fallen steadily since they peaked during the last three months of 2001 at 70%. The reason for borrowers choosing fixed rate loan deals appears to be a perception that this type of long term loan offers security.

Two year fixed deals are the most popular, with three year deals following closely behind, according to a survey of financial advisers. Fixed rate deals running for a period of five and ten years also showed an upturn from a similar period last year.

In the opinion of John Heron, the MD of Paragon Mortgages, lenders have become much more cautious over the past year and more reluctant to lend to consumers on an interest only deal. The other side of the coin is that borrowers also want security, so they are keen to sign up for long term fixed rate deals. Many of those people who agreed a long term fixed rate mortgage must now be regretting the decision following the base rate cuts made by the Bank of England says Mr Heron.

Nevertheless they will know how much they will have to find to cover mortgage repayments over a given length of time. There are pros and cons to long term fixed rate mortgages and borrowers should feel comfortable about the term of their mortgage before signing up, he says.

The mortgage market can be a minefield for the unwary. So what is the best way of comparing mortgage deals? We would certainly recommend the internet for the following reasons.

Specialist comparison websites can access the whole of the mortgage market. An individual would find this to be an impossible task. Drawing upon years of experience they can help select the right mortgage for you. They will even fill in your application form and follow it up on your behalf. They have access to exclusive mortgages, which offer you better deals than going direct to UK lenders. Many of these mortgage comparison companies offer their services free. How can they afford to offer a free service. The answer lies in the procuration fee, which lenders pay for arranging a mortgage.

The constraints put on nationalised banks like Northern Rock is illustrated by a recent announcement. They have said that they are putting up the cost of a number of fixed rate mortgage deals. The group is raising rates on its two, three and five year fixed rate loans by between 0.2 and 0.3 per cent.

The move ensures that it does not breach competition constraints placed on it to prevent the Company taking advantage of its Government backing. Under these rules, Northern Rock is not allowed to write more than 2.5 per cent of all new mortgages in a year. It must avoid appearing at the top of a best buy table for a prolonged period of time.

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