Today’s meeting was always going to be a damp squib but next Wednesday’s Quarterly Inflation Report will be much more interesting and its content carefully scrutinised, not least for the MPC’s updated views on its guidance policy.
Over the last fortnight there has been some jockeying of positions on 2-year fixed rates, with some rates being increased and others decreased. However, it is a different story in the 5-year fixed rate market, where the trend has been all one way – upwards, except for Nationwide’s existing borrower moving home 95% LTV rate. Most of the major lenders, and some others, have increased some of their 5-year fixed rates during this period, with increases ranging from 0.07% to 0.30%.
At first this upward movement looked like a delayed reaction to the increase in swap rates in December, but swap rates have been falling since the New Year and so it is no longer realistic in February for lenders to try to justify rate hikes on the basis of an increase in the cost of funds last year, not that has stopped some from trying to do so.
To add some hard facts to this analysis, the recent peak in 5 and 10 year swap rates was on 27 December, at 2.19% and 3.05% respectively, whereas yesterday’s closing rates were 28 basis points lower at 1.91% and 2.77%. Of course few, if any, lenders were contemplating mortgage rate changes between Christmas and New Year and so the recent peak in rates was never fully reflected in mortgage pricing. Nevertheless, swap rates are now also lower than they were 5 months ago, when on 10 September 5 and 10-year swaps were 2.01% and 2.96% respectively.
This begs the question of why are 5-year fixed mortgage rates still increasing, not just since the New Year but also over the last few months. Part of the answer is that mortgage rates were very slow to react to the upward movement in swap rates after the market bottomed out on 5 April last year, at 0.91% for 5-year swaps and 1.82% for the 10-year. However, mortgage pricing never fully reflected these very low rates.
The lowest rate that 5-year fixes fell to last year was 2.48% and several lenders are still offering rates just under 3%.
This allows lenders to argue that mortgage rate increases of just under 0.5% from their floor are less than the increase in swap rates over the last 10 months. However, it doesn’t explain why mortgage rates and swap rates are now going in the opposite direction and there is no evidence that the 26 April implementation of the Mortgage Market Review is a factor.
The most plausible explanation appears to be that application volumes in January were well above the levels most lenders had budgeted for and as a result some lenders’ admin is beginning to creak.
The most obvious ways for a lender to take the pressure off are to increase prices and/or withdraw some products. Providing they don’t price themselves out of the market completely this of course also has the knock on benefit of substantially increasing margins on new business.
What Should Borrowers Do Now?
Not all lenders have increased their rates and so there are still plenty of good value deals to choose from. However, even though recent rate increases are based on what appears to be a temporary factor, that temporary factor could easily last a few months.
Therefore lenders which have not increased their rates, or not increased them much, are likely to come under pressure as they see increased volumes from pricing which is now more competitive.
For example NatWest only increased its 5-year fixed rate up to 60% LTV by 0.07% to 2.95%, but as the previous market leader, Yorkshire Building Society, has since increased its cheapest rate from 2.84% to 2.99% the NatWest mortgage has become market leading.
Therefore the short term message for anyone wanting a 5-year fix is not to hang around – rates are only going one way in the short term - but it would not be wise to chase rates up very far as most indications are still that Bank Rate will not rise until at least the second half of next year, and quite possibly not until 2016.
As fixed rate pricing has increased, pricing of new variable rates has been falling. A year ago 5-year fixed rate mortgages were a no brainer as they were priced below comparable variable rates.
Today not only are 5-year fixed rates about 1% dearer but many term rates are available with no early repayment charges, whereas Hinckley & Rugby is the only lender offering a 5-year fixed rate (excellent value at 3.39% up to 80% LTV) with no early repayment charges.
If this differential increases much more the question of how big a premium is worth paying for the security offered by a 5 year fixed rate will become increasing relevant.