Lift in variable mortgage interest will spark a mass return to fixed rate deals

FIXED rate mortgages are set to return to favour after the UK's biggest lender hiked the cost of its standard variable rate (SVR) for new borrowers.

Customers reaching the end of mortgage deals with Lloyds TSB Scotland and Cheltenham & Gloucester, part of the Lloyds Banking Group, will be moved onto a higher variable rate of 3.99 per cent when their deals end rather than the current SVR, which guarantees to stay within 2 per cent of the base rate.

Borrowers typically move to their lender's SVR when their fixed rate deal comes to an end and many have chosen to stay there since the Bank of England chopped interest rates to 0.5 per cent in March 2008.

The proportion of borrowers on fixed rate mortgage deals reached its lowest level in five years in March and April, Council of Mortgage Lenders figures show, with SVRs still cheaper than fixed rates on average.

The Lloyds SVR guarantee makes its current 2.5 per cent rate the cheapest on the market and borrowers have taken advantage by staying on it over the longer term. However Lloyds is to introduce the new Homeowner Variable Rate on 1 June, meaning the rate will come into force on 1 June, 2012 for new customers tying into the shortest fixed deal of two years. Existing customers will not be affected and the new rate will not apply to borrowers with Bank of Scotland, which has its own SVR of 4.84 per cent.

Nationwide and several smaller building societies made similar moves last year and other providers are expected to follow suit.

The move back to fixed rates may be hastened by a gradual decline in the cost of fixed rate mortgages, which is at its lowest level for 15 months. The average two-year fixed rate mortgage deal now cost 4.61 per cent, compared to a peak of 5.21 per cent since base rates reached the bottom, according to Moneyfacts.

But Slade pointed out that borrowers still benefiting from low SVRs are likely to stay where they are for the time being.

"Borrowers on a high SVR may be more inclined to move back onto a fixed deal now that they have become more competitive," said Slade.

"But rates will need to fall further for most of those on record low SVRs to make the switch. Once a bank rate rise becomes imminent, we will then likely see a rush of borrowers looking to lock into a fixed rate deal."