Navigating the mortgage market maze is difficult at the best of times, but the last five weeks have been more turbulent than most. June saw the cost of fixed rate mortgages rocket, with many lenders increasing their 5 year fixes by around 1%, despite swap rates peaking as long ago as 11 June.
The Council of Mortgage Lenders yesterday defended lenders’ decisions to keep rates high, in the face of falling swap rates, saying that there is a complex array of influences on lenders' pricing strategies at present. This is undoubtedly true, but swap rates remain an important benchmark. It is, nevertheless, fair to point out that, contrary to the lack of it in the mortgage market, there is fierce competition for savings and this has been driving up rates for savings fixed rate bonds, which are still rising despite the recent fall in swap rates.
Ray Boulger, senior technical manager at leading UK mortgage broker John Charcol, commented, “Since the end of last week a few lenders, namely Woolwich, Lloyds TSB/Cheltenham & Gloucester, Halifax and Britannia have announced small reductions of. 0.1% - 0.3% in selected fixed rates, but in general lenders have at best left their fixed rates unchanged and some, including Northern Rock, have further increased their fixed rates, as a result of which many now look expensive.
“Over the last month as a result of the combination of higher fixed rate mortgages and lower swap rates the spread between 5 year swap rates and mortgage rates has widened by about 1%, which is a huge movement in such a short time. During the same period 3m Libor has fallen from 1.25% to 1.01% but the rates on most tracker mortgages have not changed. Thus the premium over the initial tracker rate one now has to pay to secure the interest rate protection provided by a fixed rate for 5 years or longer has risen to well over 2%.”
Boulger continued, “Money market rates have fallen over the last month because of a reassessment by the market of how long it will take to climb out of the recession and hence how long interest rates will stay low. It now looks as if Bank Rate will stay low (although not necessarily at 0.5%) for at least 2 – 3 years and the general view is that the risk of inflation returning soon has also diminished, although of course these two factors are closely linked.
“The trackers offering best value generally are lifetime ones, either those with no early repayment charges (ERC), such as HSBC, or a low ERC, for example Woolwich and Abbey, or alternatively those with a droplock option, which is only offered by Nationwide and RBS. Any of these options will leave borrowers free to switch to a fixed rate without significant costs when fixed rates again start to look attractive. An alternative would be a 2 year tracker as the ERCs will only last for 2 years, but this is a more risky option because if it looks right to switch to a fix within 2 years it would be expensive because of the ERC.”
