Swap rates fall, but fixed rates don't
Posted on 25 August 2009 by
In its regular comparison of the price of fixed rate mortgages with swap rates Moneyfacts has today flagged up that the current differential of 3.14% between 2 year swaps at 2.04% and the average 2 year fix at 5.18% is the widest on record. It hasn’t commented on other terms but all will be at or close to record levels.
As it points out, of the few changes in mortgage fixed rates over the last month there have been more increases than decreases and although lenders, especially the building societies, are now relying more on savings than wholesale funds for new funding there have also been few changes in savings rates.
The reason for this is very simple. Broadly unchanged mortgage rates over the last month compare with 2 year swap rates down by 0.21% from 2.25% a month ago (24 July). Longer term swap rates have fallen slightly more. I suspect in a month’s time Moneyfacts will be able to report another record spread. Most lenders are not cutting rates because they are struggling to meet demand for mortgages and have to ration funds somehow.
Up to the 1980s building societies were the dominant force in mortgage lending and prior to Abbey National, as it was then called, breaking the building societies’ cartel in 1983 mortgages were rationed by requiring people to save with their chosen society for a year or more before being considered for a mortgage.
The successful applicants generally were normally charged the same rate whether they borrowed 10% or 90% of the property value, although a one off fee (mortgage indemnity guarantee premium) was charged for mortgages above 75%. Furthermore most borrowers didn’t have a choice of fixed or variable rates. The choice was SVR or SVR and most lenders’ SVRs were the same, the Building Societies Association’s recommended rate. This system also, of course, provided a captive source of savings.
In today’s world rationing is rather more sophisticated and pricing is a key part of it, as is credit scoring, which didn’t exist in the 1980s. Also August is traditionally a month when some lenders want to reduce the amount of business they accept because they have less staff to process applications. Thus with increased mortgage demand as a result of more activity in the housing market, but little in the way of increased supply of funds, pricing power will remain with lenders for the foreseeable future.
The reason swap rates have fallen this month is the Bank of England’s surprise decision to extend its Quantitative Easing programme by £50bn, coupled with its Quarterly Inflation Report the following week, both of which made it clear The Bank expects the economic recovery to be slow, with the consequence that inflation and hence interest rates will remain low for at least another 2-3 years.
Although fixed rates are still the preferred option for the majority of our clients, over the last two months we have seen a substantial increase in the proportion of clients either taking a new variable rate or staying on their existing SVR, as fixed rate pricing looks increasingly uncompetitive with the current outlook for interest rates.
Meanwhile, in another sign of strain Scottish Building Society has just announced an increase of 0.25% in its SVR to 5.29%. It won’t have taken this decision lightly and so this is an indication its net margins are under pressure.
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colin martin says:
Ray says:
The 2.5% SVR doesn’t apply to all lenders in Lloyds Banking Group but as you point out it is the rate for the three main lenders in the original group, Cheltenham & Gloucester - Lloyds TSB and Lloyds TSB Scotland. There are two other lenders with an SVR of 2.5%, Intelligent Finance, which is now also part of Lloyds Banking Group after the HBOS takeover, and Nationwide, although the latter recently introduced a new higher SVR at 3.99% with no Bank Rate cap for new customers and existing customers taking a product transfer.
All the lenders who have their SVR at 2.5% have been forced to come down to that level by the small print in their rules – one of the few examples of small working in the customers’ favour. These lenders all have a clause in their small print which says that their SVR will not exceed Bank Rate by a margin of more than 2%. As they have been forced into a situation which is uncomfortable for them you can be sure that their SVRs will rise in line with Bank Rate at least until it goes over 3%, thus making these SVRs pseudo trackers for the time being.
Halifax used to have the same clause but its rules allowed it to change the maximum margin above Bank Rate by giving customers one month’s notice and it exercised this right last September to increase the maximum spread to 3%. Skipton also has a clause restricting its SVR to 3% over Bank Rate and hence these 2 lenders’ SVRs are 3.5%. Several other lenders, including another Lloyds Banking Group and ex HSOS member, BM Solutions, used to have revert to lifetime tracker rates of less than Bank Rate + 2%, with some rates, e.g. from Woolwich and Alliance & Leicester on some of its deals, being better than Bank Rate + 1%. Even now, Woolwich’s revert to rate for all its residential deals is Bank Rate + 1.49%.
M Edwards says:
Magic Clause says:
Ray says:
It cited mortgage condition 7.17(c) as the justification and this condition says “We may change the marginal rate at any time by giving you at least 21 days notice.”
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