Mortgage rates are expected to rise again in coming weeks, in spite of the Bank of England’s unprecedented intervention to ease liquidity in the banking system.
Brokers are gearing up for another round of increases and fear that borrowers may reap no benefit from the Bank’s move for at least three months. HBOS last night pulled most of its mortgage range and immediately repriced some rates 60 basis points higher.
Brokers said two-year fixed rates were particularly vulnerable to further rises. Swap rates, which determine the cost of fixed short-term borrowing, have shot up in the wake of the Bank’s offer to swap old mortgage debt for less risky government bonds.
Two-year fixed rates are already around 80 basis points higher than a year ago. Many providers are charging a full percentage point more.
“Unless you pay a really large fee, the market-leading fixed rates start at around 6 per cent,” said Ray Boulger, senior technical manager at John Charcol, the broker.
Cheltenham & Gloucester and Intelligent Finance made further sharp rises to rates this week, while Edeus stopped lending altogether.
Brokers said new tracker mortgages were on average half a point more expensive now, with the base rate at 5 per cent, than when it was 5.75 per cent. The base rate therefore needs to drop by at least another half point just to bring rates back down to where they were last July.
Boulger believed the base rate would have to come down to around 4 per cent to have a chance of stimulating the housing market and encouraging private investors back into mortgage-backed securities.
A healthy secondary mortgage market is critical to ease liquidity and bring down borrowing costs for banks, but there is little evidence of it opening up.
This week, Libor – the rate at which banks lend to each other – barely moved. Brokers warned there was unlikely to be any improvement in mortgage rates for at least a few months, and maybe not until next year.
“Until confidence returns and Libor starts to fall, new mortgages will stay expensive,” said Melanie Bien at Savills Private Finance.
Some lenders may be reluctant to compete for new mortgage assets now that house prices have begun to fall.
“For some banks and building societies, it doesn’t make sense to cut rates to encourage assets on to their books,” said a spokesman at one of the banks. “They’re being incredibly careful about their capital to boost earnings and margins.”
Peter O’Donovan, mortgage manager at Bestinvest, said none of the banks wanted to be the first to lower rates as it would be inundated with new business.
