Fixed Rate Mortgages Set to Increase

June 16th 2009

With most borrowers currently choosing a fixed rate mortgage, if interest rates continue to rise then the recent recovery in the housing market, which is based primarily on much improved affordability as a result of the combination of lower house prices and lower interest rates, may well wobble.

The message for borrowers wanting to take a fixed rate is clear; get in now or miss out on the current relatively low rates.

If you would like advice on your mortgage please give us a call on 0113 287 8200 or e-mail advice@prosperis.co.uk

There is still some comfort for borrowers looking for a tracker rate as there is no reason for lenders to increase tracker rates just yet, based on the cost of funds; three month Libor has been slowly edging lower and is currently at its all time low of 1.26%. Its margin of 0.76% over Bank rate is the lowest it has been for several months. However, lenders with particularly competitive tracker rates may still increase them if they want to reduce the volume of applications they receive.

Short dated gilt yields have risen sharply recently, with the yield on two to four year gilts up by around 0.14%. Swap rates rose even more with two and three-year swaps up by over 0.2% and five years up by 0.14%, whereas the 10 year rate increased only marginally by 0.02%.

Gilt yields and swap rates reached their recent lows on May 14, the day after the publication of the Bank of England’s Quarterly Inflation Report, and since then three and five year swap rates have surged by a massive 0.62%.

This situation has some parallels with the US. The yield on the US benchmark 10 year Treasury Bond bottomed out on 15 January this year at 2.14% but less than four months later closed a whopping 1.74% higher. As a consequence rates on a US 30 year fixed rate mortgage, the most common type of mortgage in the US, have risen by 0.45% in the last month alone to around 5.45%, compared to the recent low of 4.85%.

These changes in both swap rates and short dated gilt yields happened at a time when the Bank of England’s Quantitative Easing programme is designed to drive down yields. This situation presents the chancellor and the Bank of England with a major problem. Having pushed Bank rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the government is impotent in this area and has lost control of interest rates except at the very short term end.

If you would like advice on your mortgage please give us a call on 0113 287 8200 or e-mail advice@prosperis.co.uk

*SWAP rates are a mechanism through which lenders can acquire a fixed price for funding over  a specific period of time, normally from 1 year to 10 years – although most commonly 2, 3, 5 and 10 year SWAP rate programmes are used as these are then used to create fixed rate mortgage products for homeowners, property investors and  business mortgages.