After four interest rate rises, most borrowers are remortgaging to save money rather than spend, and the proportion is getting larger, says specialist buy-to-let lender Paragon Mortgages in its quarterly report.

Intermediaries report a slight decline in the number of mortgages arranged since the end of last year, says the firm. Even so, business volumes remain at or above the healthy levels seen in 2002 and early 2003.

Paragon Mortgages’ managing director John Heron comments: “After bumper business levels at the end of 2003, as people refinanced their mortgages to take advantage of low interest rates, brokers are reporting that business volumes are marginally down, reflecting a slight cooling in the housing and mortgage markets.”

“However, business is still healthy, with current volumes of 30 mortgages arranged by office in the quarter still well above the average of 25 in 2001, and marginally above the average of 29 in 2002 and 2003.”

Brokers have also trimmed their expectations for business growth next quarter, predicting on average 3.4% more mortgages than this quarter. This compares with expected third quarter growth of 4.5% a year ago and 6% two years ago.

Remortgaging continues to be the principal reason for borrowers to arrange a loan, accounting for more than half (51%) of mortgages handled by advisers – a proportion that has been stable for the past three quarters.

Looking at borrowers’ motivation for remortgaging, almost four out of ten borrowers (38%) remortgage in order to reduce or control outgoings, the same proportion as last quarter. The proportion of borrowers remortgaging to reduce or control outgoings has risen from a low of 35% in September 2003 to the present level.

Of customers who remortgage in order to borrow additional funds, only 15% use the money for consumer spending, while 22% use it for home improvements and 22% to purchase a second home.

John Heron explains: “Remortgaging remains by far the most important reason for arranging a loan, but a large proportion of borrowers – almost four in ten – do so to save money rather than spend it, with 38% doing so to reduce or control outgoings.”

“Those who do remortgage in order to fund expenditure are three times more likely to put the money into a long-term property investment rather than using it for short term consumer spending: 22% spend it on home improvements, 22% on a second property – and only 15% spend it on good times today!”

In terms of borrowers’ preferences for interest type, this quarter’s survey reveals a return to favour of fixed rate, which rose from 29% to 34%, following three quarters of decline. As last quarter, base rate trackers remain marginally the most popular interest type, accounting for 35% of cases – the same as last time. Discount mortgages fell from 32% to 26%.

John Heron comments: “This time, there seems to be no strong preference between tracker and fixed rate products. Some borrowers clearly like the certainty of a fixed rate in a rising rate environment, while others like the transparency and flexibility of a tracker, in the expectation that rates won’t rise too much.”

There has been a downward drift of capital and interest mortgages since they peaked at over 70% of the total in in the last quarter of 2001: they now account for 66% of loans. Over the same period, interest only has risen from below 10% to 17% this quarter.