The cost of an average two-year fixed rate mortgage has increased by over 60 basis points in the last three months, according to Legal & General.
However, Legal & General’s analysis of 24,000 mortgage applications also revealed large numbers of borrowers have moved to fixed rate deals.
The L&G Mortgage Purchase Index found the average two-year fixed rate was 6.51% between March and May 2008, compared with just 5.87% between December 2007 and February 2008, a difference of 64 basis points.
Over the same period, five-year fixed rates increased 52 basis points to 6.34% on average, despite the Bank of England cutting base rates in April. Ten-year fixed rates remained stable at 5.97%.
Growing uncertainty about the future of interest rates has caused many more borrowers to opt for steady repayments, with 75% of borrowers choosing a fixed rate in the past three months, compared to 57% in the previous quarter.
Stephen Smith, director of housing at Legal & General, comments: “The price of fixed rates and petrol keeps going up and up, yet consumer appetite for both shows no sign of abating.
“There has been a huge jump in the number of homeowners opting for fixed rate mortgages despite the significant increase in rates, particularly for two and three year deals.”
Average LTV’s also fell, as borrowers are forced to stump up larger deposits as high-LTV deals either disappear or are given unattractive interest rates.
The average residential LTV fell from 66% to 63% by the end of May, while buy-to-let mortgages saw a major reduction from 76% to just 67%.
High inflation has increased the chance of the Bank of England raising interest rates before the end of the year, pushing up fixed rates, but also increasing demand for them.
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