NO ACTION FROM MPC BUT COMPETITION IS HOTTING UP IN THE MORTGAGE MARKET

Posted on 8 October 2009 by Drew

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Today’s no change decision may be a bit of a non event but there is at last some action back in the mortgage market.  September saw the usual seasonal upturn and over the last few days we have at last started to see some real competition from lenders, albeit primarily for lower LTV business.  Woolwich, Northern Rock, Abbey, Alliance & Leicester, Principality and Coventry have all announced cheaper deals this week which is good news for borrowers.

This activity has been encouraged by 3 month Libor stabilising just above Bank Rate at 0.55% and swap rates continuing to fall sharply following the MPC’s decision in August to extend Quantitative Easing by £50bn.  2 year swaps hit a new all time low of 1.75% this week and 5 year swaps are at 3.10%, 0.65% lower than the rate of 3.75% the day before the August MPC meeting.

What should borrowers do now?
Although the cost of fixed rate mortgages has fallen a little over the last month most still look expensive in relation to tracker/discount rates, some of which have also fallen during the month. Thus variable rates continue to look more attractive for those borrowers who don’t need or want the security of a fixed rate. On Tuesday of this week Woolwich reduced the rate on its lifetime tracker by 0.45% up to 70% LTV and cut the early repayment charge (ERC) period to 2 years. Its new lifetime rate is Bank Rate + 2.29% with an ERC of 1% to 31/1/12. HSBC is still offering ERC free lifetime tracker rates at Bank Rate + 2.24% up to 60% LTV, Bank Rate + 2.45% to 75% LTV and Bank Rate + 4.09% to 90% LTV.  With the exception of HSBC’s 2 year discount at 1.99% these 4 lifetime trackers are cheaper than nearly all the 2, 3 and 5 year trackers or discounts currently available and thus for most borrowers wanting a variable rate one of these lifetime trackers will be cheaper than a short term deal.

And what will we see next month?
The minutes of last month’s MPC meeting suggested that inflation will be very volatile over the next few months.  They also flagged up that as the expected autumn utility price falls hadn’t materialised the likelihood of CPI falling below 1% was reduced but that short tem volatility in CPI would have little implication for policy unless the medium term outlook changed. Next month’s Quarterly Inflation Report will provide a useful update on the Bank’s inflation expectations and give the MPC more confidence in deciding whether to extend the Quantitative Easing programme. 

The one set of economic statistics which continues to record increases are the house price indices. Nationwide’s real, i.e. non seasonally adjusted, index, has risen by 5.7% in the first 9 months of this year and 9.5% from its floor in February. The imminent ending on 31 December of the temporary suspension of stamp duty land tax on properties between £125,001 and £175,000 will persuade some people to bring forward a purchase, especially as house prices are still rising, and, although the impact is likely to be modest, it will flatter house prices indices until the end of this year, at the expense of smaller increases next year. In line with my forecast last month house prices as measured by Nationwide for September are unchanged on a year on year basis. When October’s figures are announced I confidently expect the year on year figure to be comfortably into positive territory. I now expect this index to end 2009 with a rise of around 71⁄2% but for the rate of increase to slow down in the New Year. However, if house prices were to continue to increase next year at the current rate there would be a serious risk of an earlier than expected increase in Bank Rate.

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