Morning:
8°c
Fixed-rate mortgages costs set for rise
10 Jun 2009The cost of fixed-rate mortgages looks set to increase in the coming days as lenders pass on a rise in wholesale funding costs to borrowers, it was warned today.
Swap rates, upon which fixed-rate deals are based, have risen sharply since the middle of last month, and this is expected to trigger a round of re-pricing among lenders in the week ahead.
The move will be bad news for people looking to remortgage or buy a home, as around two-thirds of borrowers are opting for fixed-rate loans to take advantage of the current low borrowing costs before interest rates start to rise again.
Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "On Monday we saw another sharp rise in swap rates, following closely on from other recent increases.
"The scale of the increase was large enough to be the straw that breaks the camel's back and as a result I expect several lenders to increase the cost of at least some of their fixed-rate mortgages over the next few days."
Two-year swap rates, upon which two-year fixed-rate mortgages are based, have soared from 1.98% on May 14 to 2.48% on Monday, although they have since eased back slightly.
The rise is even bigger for three and five-year swap rates, with these increasing by 0.62% during the same period, to stand at 3.11% and 3.76% respectively.
Ten-year swap rates have also increased, rising by 0.44% to 4.24% since mid-May.
The rise in funding costs comes at a time when lenders have increased the margins they charge on fixed-rate mortgages due to the increased risk of borrowers defaulting on their debt.
The average cost of a two-year fixed rate loan is currently 4.68% - 2.26% more than the two-year swap rate.
The current differential is a far cry from the situation in July 2007, when the credit crunch first struck, when lenders were actually making a loss on two-year fixed-rate deals, charging borrowers an average of 0.05% less for the mortgages than two-year swap rates.
Mr Boulger warned that increases in mortgage rates could stifle some of the recent signs of recovery in the housing market.
He said: "With most borrowers, including around 80% of our clients, currently choosing a fixed-rate mortgage, if interest rates continue to rise, then the current 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."
NatWest Mortgage Services is offering the best two-year fixed-rate mortgage at 3.19% with a £799 fee for people with a 25% deposit, while Britannia has the best deal for people with only 10% to put down at 5.49% and no fee.
For borrowers who want to lock in for five years, Chelsea Building Society is leading the field with a rate of 4.50% and a £995 fee on loans of up to 65% of a property's value, and NatWest Mortgage Services is offering 5.49% with a £299 fee for those with a loan-to-value ratio of 85%.
