As the economy has shown signs of bottoming out and the mortgage market is showing signs that credit conditions are easing, many lenders are now more willing to lend. But the latest data show most lenders prefer short term deals.

Independent provider of personal finance Moneyfacts.co.uk said that in the past eight months, whilst bank base rate has been kept on hold, the total number of residential mortgages available has increased from 1,209 to 1,624, the majority of which being two year fixed rate deals.

Michelle Slade, spokesperson for Moneyfacts.co.uk, said, “In such uncertain times, borrowers and lenders alike seem to prefer shorter term deals, where changes can be made relatively quickly if market conditions change dramatically.

“If lenders maintain the increased margins they have placed on mortgage deals, this short term view is likely to prove more expensive for borrowers in the long run.

Data gathered by Moneyfact.co.uk showed that the average rates on two year fixed deals continue to see significant falls, standing currently at 4.93%.

Rates remain less favourable on longer term deals, where the average five year fixed stands at 6.15%. The average three year rate continues to increase, standing at 5.60%.

Slade explained that the enhanced competition in the two year market has increased the attractiveness of the available deals, “but at £928, the average arrangement fee remains more than £100 higher than on longer deals.”

She said that lenders are discouraging borrowers from taking medium to longer term deals which charge higher interest rates, knowing that the extended periods of repayment, coupled with the lingering economic uncertainty in the near future, bring a high risk of default.

“Borrowers’ love affair with shorter term deals means lenders benefit from the increased frequency with which arrangement fees become payable. By opting for a five year deal, borrowers are likely to benefit from a more stable mortgage market when they come to remortgage. Increased equity in their homes from rising property prices will increase their chances of being eligible for a more competitive deal at a lower LTV band,” Slade commented.
©MoneyHighStreet.com Personal Finance