Base rate cuts fail to spark tracker demand

A succession of base rate cuts failed to encourage homebuyers to take out variable products in the final months of 2008, a Legal & General (L&G) study suggests.

According to the firm's latest Mortgage Purchase Index, tracking Q4 2008, the number of borrowers taking out variable deals fell 17%.

However, while the number of residential borrowers opting for a variable deal fell to 29%, they remain the product of choice for the majority of buy-to-let investors, with 56% of landlords plumping for a tracker.

The study also found the average two-year fixed rate fell to 5.9% from. 6.38% in Q3, while the average three-year fixed rate dropped to 6.30% from 7.41% the previous quarter.

Stephen Smith, director of housing at L&G, attributed the declining popularity of tracker rates to the fact so many products have been withdrawn.

"The cuts in the base rate are a mixed blessing for the mortgage market," he says. "Clearly, cheaper rates will mean some people avoid payment difficulties, and therefore repossession, but overall repossession number are expected to increase in 2009.

"Rates are now at such spectacularly low levels that the incentive to remortgage for borrowers may be vastly reduced."

He adds: "If the 'go to' rate which a customer is going to pay at the end of a deal period is under 4%, then customers might just decide to stay there. We think, as a result, the remortgage market will take a big hit next year."