The December survey of financial advisers and mortgage brokers from Paragon Mortgages shows a significant rise, for the second consecutive quarter, in the proportion of borrowers remortgaging for the purposes of buying a second property. 20% - or one in five – remortgage applications was to release equity to buy a second home, up from 15% six month ago.

Paragon Mortgages’ managing director John Heron said: “Buoyant house price inflation over the past couple of years means that many home owners have built up significant equity in their homes.”

“As a result, an increasing number are taking the opportunity to remortgage their properties in order to release equity to buy second homes, either in the UK or abroad.”

Despite the growth in purchase of second homes, reducing or controlling out-goings continues to be the prime reason for remortgaging, accounting for 37% of the total, and home improvement accounting for 25%.

The mortgage market

Remortgages continue to represent more than half of mortgages arranged (51%), slightly down from the peak of 53% last summer, but still the largest category, with many borrowers taking advantage of historically low interest rates to reduce their out-goings or raise additional finance at attractive prices.

Buy-to-let rose marginally, from 11% to 12%, while first time buyer cases continue to account for a very small percentage of applications – just 10%, compared with 19% two and a half years ago.

Advisers also reported a strong growth in their business volumes in the final quarter, rising by 8% to 32.4 from 30.1 cases last quarter. They expect further growth this coming quarter, but at a lower level than seen in the past couple of quarters – a rise of 1.3% is anticipated in Q1 2004.

John Heron continues: “2003 proved a bumper year for the mortgage market, with advisers seeing very good business levels.”

“They remain cautiously optimistic for 2004, although a lower level of growth is expected this quarter than last quarter. This supports the view that the housing and mortgage markets are entering a period of consolidation.”

The vast majority of borrowers still elect for repayment of capital and interest. However, having remained steady at around 70% of mortgages for almost two years, capital and interest has waned slightly in popularity over the past two quarters, falling from 70% to 65% over the six-month period. Interest only mortgages have seen growing popularity over the past two quarters, rising from 14% to 17% of loans arranged.

In terms of interest type, fixed rate has seen declining popularity over the past two quarters, from 38% to 33%. Fixed rate remains the most popular type of mortgage, by a small margin, but much less so than in late 1997 and early 1998 when over half of loans were fixed rate.

Base rate trackers and discount rates without cash-back are only slightly less popular, now representing 31% and 27% respectively, while discount rates with cash-back accounted for a further 5%.

John Heron explains: “Two-thirds of borrowers are now electing for variable rate mortgages, reflecting a widespread belief that interest rates will not rise to a large extent and a preference for greater flexibility than offered by a fixed rate. Also, the growing popularity of current account and offset mortgages encourages borrowers to choose variable rate products.”