A resolution to the conflict driving up oil and swap rates may arrive before US midterms
The fate of UK mortgage rates may rest less with the Bank of England than with events unfolding thousands of miles away.
Sebastian Murphy (pictured top), group director at JLM Mortgage Network, told Mortgage Introducer the geopolitical pressures keeping swap rates elevated – and fixed mortgage rates with them – appear to be heading toward a resolution, and that brokers should be positioning clients accordingly.
Murphy pointed to the prolonged conflict involving Iran as the single biggest variable keeping swap rates elevated. He argued that any resolution – and with it the reopening of shipping lanes through the Strait of Hormuz – would rapidly push oil prices lower, drag wholesale funding costs down with them, and give the Bank of England the headroom it needs to resume cutting the base rate.
"As soon as those shipping lanes are agreed, you should see oil prices drop and then you'll start seeing wholesale funding dropping," he said. "As soon as there is any deal done, you'll suddenly see oil prices drop through the floor, swap prices drop through the floor, the Bank of England can start feeling comfortable that this so-called fuel crisis is over, and they will start cutting rates again, as they very publicly said."
He believes the US is also signalling urgency on the Ukraine conflict, pointing to CIA director John Ratcliffe's unannounced flight to Moscow last week as evidence President Donald Trump is pushing to bring multiple flashpoints to a close before November's midterm elections. "They made it very public that they sent the head of the CIA to Russia to, in essence, try and bring matters to a close," Murphy said. "Trump's administration is saying we've got to bring these matters to a close, and they’re being very public about it."
What the bond market is really telling brokers
Murphy was speaking as some calm returned to the gilt market on Thursday, with the 10-year yield pulling back 10 basis points to 5.13%, retreating from an 18-year high set the previous day. But he is clear the partial recovery does not change the underlying picture for fixed-rate borrowers.
"Sadly, what it means for mortgage borrowers at this moment in time is that fixed rates will stay high," he said. "The base rate's unlikely to go anywhere. There's still a very small chance of it going up."
The disconnect between the Bank Rate and fixed-rate pricing has widened sharply this year. Murphy noted that fixed rates at the same loan-to-value were around 3.7% in February, while they now sit closer to 4.7% – a near-one percentage point shift driven entirely by rising swap rates, not by any move in the Bank Rate, which has been held at 3.75% since last December. He placed the bond market volatility in a wider global context, describing it as markets forcing governments to confront unsustainable debt levels. "If you look at someone like Japan, they're three times over their agreed debt target. The US is double. It's insane."
What should borrowers do right now?
Despite the turbulence, Murphy's guidance to brokers has not changed since February, and the data suggests clients are already listening. Analysis from mortgage and protection network Stonebridge found tracker products accounted for 12% of mortgage choices in April, up from 4.1% in the same month the previous year – a surge in demand for tracker mortgages that reflects the pricing gap that has opened up between variable and fixed products.
Murphy said variable rate products are currently around half a percentage point cheaper than fixed equivalents, and most carry no early repayment charge, giving clients flexibility to move if conditions improve. He described it as a rare window that opens only once a decade or so.
"Even if you've painted the worst picture of maybe the Bank of England reluctantly having to put the base rate up once, most consumers at this moment in time are much better off on a tracker with no penalties than starting off on a much higher fixed rate," he said. "We only get these periods probably once every 10 or 12 years in the market, and that's where we are."
The lender picture
The broader lender environment also plays into the case for patience. Murphy said major lenders cannot afford to close out the year with completions running below target, which should provide a floor under any further rate rises in September and October. The caveat is that the way lenders are funded is creating a split picture – self-funded institutions have more flexibility to cut independently, while warehouse-funded lenders are more directly exposed to swap rate movements. "You're going to see a real kind of juxtaposition with lenders depending on how they're funded," Murphy said.
Murphy's broader message to brokers was to tune out the noise, including media commentary he said is generating unnecessary confusion among consumers about the difference between swap rate movements and base rate changes, and focus on what the Bank of England is actually signalling.
"It's a case at the moment of brokers listening to the Bank of England," he said. "Not anybody else, not the broadsheets, not Newsnight, not the BBC, not Sky – listening to your central bank. And your central bank at the moment is sitting on their hands and waiting to see what's going to happen because most economists are betting that there's going to be a deal done."
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