Economic News

LONDON (ShareCast) - Almost nine out of ten homeowners taking out a mortgage in the second quarter chose a fixed-rate deal, fearing the almost inevitable hike in interest rates next year.

Figures from Legal & General (3166.KL - news) show 87% of residential borrowers went for certainty when picking their home loan, up from 71% in the first three months.

Stephen Smith, Director of Housing at Legal & General, points out that margins on variable rate products are high and it's "almost a cast iron certainty" that the next move in rates will be up.

"Fixed rates had been offering the full package until recently, in that they had been getting cheaper and they offer valuable peace of mind in a turbulent and uncertain environment," he says.

Average three, five and ten-year fixed rates all fell between March and May, but have risen in recent weeks.

Two-year deals were the most popular fix despite an increase in cost to 5.46% from 4.78% in the first quarter. Three-year fixes also flew off the shelves.

"It feels like we are entering a new phase of the credit crunch now though - talk of a recovery has been gathering pace and fixed rate pricing may well have bottomed out," says Smith.

"There has been no significant upturn in house sales or mortgage lending, but both consumer and adviser confidence is up."

Nationwide today increased the cost of its fixed rate mortgage deals for the second time in under two weeks, up by 0.5% in some cases.

It's just 11 days since Britain's third largest mortgage lender lifted its five-year fixed rate deal by 0.86%, two-year fixes by up to 0.61% and three-year products by 0.26%.

Other lenders have followed suit, leaving more mortgages out of reach of potential homebuyers and putting the fragile housing market recovery at risk.

Woolwich is upping its five-year rate from 4.79% to 5.29%, joining Britannia Building Society, Northern Rock (LSE: GB0001452795.L - news) , Abbey, Halifax and Cheltenham & Gloucester in raising the cost of fixed-rate mortgages.