Lenders signal interest rate peak with costs reversal

Many lenders are cutting the costs of their fixed-rate mortgage deals just weeks after increasing them, a sign that they believe that interest rates are nearing their peak.

January saw banks almost unanimously lift the rates on their fixed-rate mortgage offers following the surprise quarter-point rise in base rates. But lenders including Abbey, Alliance & Leicester, Bank of Scotland, Britannia and GMAC have, in recent days, all reduced the rates on two-year fixed deals by up to 0.3 percentage points. More lenders are expected to follow suit in coming weeks.

Nick Gardner, director of Chase De Vere Mortgage Management, said: “A few weeks ago the City was factoring in two more rate rises this year, but now the market is only expecting one.”

This shift in sentiment has led to a fall in swap rates – rates set by the money markets that determine the levels of fixed-rate deals – meaning that lenders are able to access cheaper funds to pass on to borrowers. The fall in swap rates accelerated this week, pushing them back to where they were in early January.

Nici Audlham Gardiner, head of mortgages at Abbey, said: “No rate rise emerged this month and there has been better news on inflation so lenders have been given enough of a margin to move rates back down.”

Brokers say longer-term fixed-rate borrowing – five or 10-year offers – also looks cheaper as the “yield curve”, which signals future rates, is sloping downwards.

Gardner warns, however, that borrowers should perhaps not breathe a sigh of relief just yet. “Inflation is still a concern and risks remain on the upside,” he said. “It is difficult to see why the market expects one less rise now because all the economic data we are seeing still suggests upwards pressure on inflation.”

However, he points out that mortgage approvals for house purchases saw their largest monthly fall in December since the early 1990s. They dropped from 128,000 in November to 113,000 in December. Also, estate agents have reported two successive months of falling numbers of buyer inquiries, after 18 months of increases.

Melanie Bien, director at Savills Private Finance, the broker, said: “The fact that fixes are falling is excellent news as figures show they continue to be popular, particularly with the threat of a further base rate rise.”

But while this is good news for borrowers, it means long-term savers should not count on further increases in returns. Fixed-rate bond rates have risen since January and are now sitting comfortably around the 6 per cent mark. Halifax’s Web Saver offers a two and three-year fixed bond rate of 6.06 per cent, while Heritable Bank is offering 6.01 per cent for three-year bonds and Northern Rock is paying 6 per cent fixed until the start of April 2008.

“Rates are more competitive than they have been for a long time,” said Julia Whittle, financial adviser at Punter Southall. But she believes another interest rate rise is already priced into bond rates. “So we shouldn’t necessarily expect them to go up again,” she said.

If you are planning to take out a mortgage – or to remortgage – and want to fix your repayments, the best two-year rate looks to be Halifax’s 4.89 per cent, although this has a £1,999 fee for new purchases. Alliance & Leicester has reduced its two-year fixed rate from 5.42 per cent to 5.11 per cent, while Abbey cut its rate from 5.24 per cent to 5.19 per cent. Both have fees of £999.

Tracker mortgages can offer better value. BM Solutions has a two-year tracker now at 4.44 per cent (0.81 per cent below base rate). Skipton Building Society has seen strong demand for capped trackers, where the rate will not exceed 5.99 per cent.