Fixed rates increasing and the demise of another droplock

Posted on 8 May 2009 by Ray Boulger

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Several major lenders are increasing some fixed rates next week, mainly longer term rates except for RBS Group, which is increasing rates across the board.

Medium and long term swap rates have risen sharply this week, with most of the increase taking place on Wednesday and Thursday. 2 year swaps are only up 0.08% on the week, but the 3 year rate is up by 0.19%, 5 years by 0.26% and 10 years by 0.28%.

The increase in swap rates is the key driver for the rate changes and these increases have taken place while the 3 month Libor rate is still falling, albeit very slowly. 3 month Libor is 0.03% lower on the week at 1.42%, still a historically very large spread of 0.92% above Bank Rate, compared to a typical 0.15% before the credit crunch.

I am surmising that the main reason for the increase in gilt yields this week, and the even bigger increase in swap rates, is that the market is getting increasingly nervous about the medium term inflationary outlook in the light of the additional £50bn the MPC confirmed yesterday for the Quantitative Easing programme. This virtually guarantees that Bank Rate will remain at 0.5% for at least the next 3 months while the Bank spends the remaining money they are "printing" and so short term rates like 3 month Libor will remain low and probably fall a little further. US$ 3 month Libor hit a new all time low today of 0.94%.

The lenders we already know are increasing some or all of their fixed rates next week on Monday or Tuesday are Yorkshire B S and RBS Group on Monday and Britannia on Tuesday.

RBS is taking the most draconian action with increases of between 0.1% (for their maximum 70% LTV range) and an outrageous 0.7% for their rates up to 80% LTV, with the rates to 85% being increased by 0.5%. These increases are allegedly to protect their service levels but with excuses like this RBS are just as bad as Ministers with their pathetic excuses over their expense claims.

Plenty of experienced mortgage staff have been made redundant over the last year and so RBS would not have any difficulty adding to its back office if the real reason for the rate increases was staff shortages. We should be able to expect more honesty, especially from a semi nationalised lender, and if RBS want to cut back their lending they should be honest enough to say so, even if it embarrasses their principal shareholder which has committed them to increased mortgage lending.

Yorkshire B S is increasing the rate on its 5 year fixes by between 0.2% and 0.3%, with the new rates starting at 4.89% up to 75% and 5.99% up to 85%, and offset versions available for 0.1% more. The arrangement fee remains at a well below average £245. Their subsidiary, Accord, on the other hand, is reducing some offset rates by up to 0.45%, but is withdrawing, and not replacing, its 5 year fix to 85%.

Britannia is sharply increasing its 5 and 10 year fixed rates from Tuesday, which means it will no longer have market leading 5 year fixes up to 60% and 75% LTV, although there are no remortgages freebies with those rates.

Going against the trend on Monday John Charcol is launching a very competitive 5 year fixed rate (to 31/8/14) for LTVs up to 75%. The rate is 4.85%, the fee £1,094 and the maximum loan size is higher than on many deals at £1m.

One other important change from Monday is that Cheltenham & Gloucester will no longer offer a droplock facility (what it calls "All Weather") on its trackers. That means Nationwide will be the only lender still offering this facility, after Woolwich withdrew several months ago. This is a great shame as the droplock concept is ideal for borrowers who want to start off with a tracker rate, whilst leaving themselves the option to switch to a fixed rate at a time of their choosing without incurring an early repayment charge or remortgaging.

 

Categories: Bank of England, Mortgages, Interest rates

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