Higher borrowing costs have rapidly reshaped borrower behaviour

Demand for variable and tracker deals has doubled compared to last September, driven by the economic impact of the war in Iran, new analysis from Moneyfacts shows.

Higher borrowing costs have rapidly reshaped borrower behaviour, the comparison website says.

The data shows that borrowers are increasingly moving towards shorter-term fixed deals as mortgage rates have risen sharply since the war began in late February.

Growing numbers of borrowers are considering taking a gamble on variable or tracker rate mortgage in the hope that money markets have overblown expectations of rate rises, says Moneyfacts.

The share of borrowers searching for a variable or tracker deal climbed from 6% last September to 13% in April – a rise of 116%.

The share of borrowers searching for two-year fixed rates has also increased slightly from 49% to 53%, but remains the most popular product choice.

By contrast, the popularity of five-year fixed rates has plunged by 15%, from 27% of searches down to 23%, as borrowers are reluctant to lock in to high rates for the long term.

Differences in pricing help to explain the trend.

Average two-year fixes have risen by 94 basis points to 5.79% since early February, before the war began.

Average five-year fixes have risen by 75bps to 5.69% over the same period, but while the rise is slightly less severe it is still significant and borrowers appear wary of being stuck on these rates for longer than necessary.

The average two-year tracker rate has risen by a lower margin, up by 20bps to 4.61%.

Moneyfacts head of consumer finance Adam French says: The economic consequences of the conflict in the Middle East have turned interest rate expectations on their head, pushing up borrowing costs and changing borrower behaviour.

With fixed mortgage rates rising sharply in a short space of time, more borrowers appear willing to gamble on rates falling sooner than markets currently expect, he said.

There has been a noticeable shift among users of Moneyfactscompare.co.uk, with more than twice as many prospective borrowers exploring variable and tracker mortgages compared to just over six months ago, he said.

While these products remain a minority choice, the increase suggests more borrowers may be prepared to gamble that rates could ease in the near term, he further said.

He added: Tracker and discounted variable mortgages can appear more attractive when fixed rates rise quickly, as they typically start lower.