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Lenders will come under pressure to offer cheaper fixed rate mortgages if the market rates they use to price deals stabilise at current levels, according to mortgage brokers.
Following last week’s turmoil in UK government bond prices, banks were forced to temporarily withdraw fixed deals for new customers as swap rates, which mitigate interest rate risk as banks swap fixed-rate money from borrowers for a floating rate, rose sharply.
Banks subsequently began reintroducing new products at an average rate almost one percentage point higher, reflecting the increased cost to lenders.
But markets have calmed in recent days following the Bank of England’s £65bn intervention in the gilts market last Wednesday and a partial U-turn by chancellor Kwasi Kwarteng on his unfunded tax cutting “mini” Budget that prompted the crisis.
Both two- and five-year swap rates have fallen back from last week’s peak of 5.9 and 5.4 per cent respectively, and are now trading just 50 basis points higher than before Kwarteng’s fiscal statement at 4.9 and 4.6 per cent.
But average rates for fixed-rate mortgages have continued to rise this week. The average for two-year fixed-rate mortgages is now 5.97 per cent, up from 5.75 per cent on Monday and 4.74 per cent on the day of Kwarteng’s announcement, according to data from Moneyfacts.
Andrew Montlake, managing director of mortgage broker Coreco, said: “If swap rates do stay down, then there’ll be a lot of pressure on lenders to reduce some of their new rates, which in time you might see them do.”
Beyond swap rates, lenders have to tread a line between remaining open for fixed-rate business and offering such attractive rates that they become swamped by borrowers eager to fix before any further expected rate rises.
“They’re essentially pricing themselves out of taking on lots of work while they assess,” said Simon Gammon, founder and managing partner of Knight Frank Finance. “I’m pretty confident that with another couple of weeks of stable swap rates, we could start to see some more sensible rates coming back to the market.”
David Hollingworth, director at L&C mortgages, said it was a “real positive” that some lenders had already started to come back with fixed rate mortgages, which should lead to “more competition, sharpening up rates a bit.”
The number of mortgage products rose from 2262 on Monday to 2358, according to Moneyfacts, although it is still far down from the 3961 available on September 23.
The Financial Conduct Authority contacted banks late last week over concerns about the sharp rise in interest payments.
In a speech last month, Sheldon Mills, the FCA’s executive director for consumers and competition, said that with 3.2mn fixed rate mortgages due to expire in the next two years it was “more critical than ever that borrowers and savers were offered fair and competitive rates.”
He said that the FCA had told lenders to do more to help borrowers switch to less costly options, and that it was monitoring developments “closely”.
But there is also a risk of further upheaval in the markets in the coming weeks with the BoE’s emergency gilt purchase programme due to expire on October 14.
Investors will also be watching for an expected early announcement by Kwarteng of the government’s debt-cutting plan — which will be set out alongside official forecasts. Allies of the chancellor have said he was aiming to bring it forward from the original date of November 23.
“There are ups and downs still to come in the days and weeks ahead,” Hollingworth said.
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