It's Time To Fix Your Mortgage
Posted on 26 June 2013
Last week's comments by the US Federal Reserve Chairman Ben Bernanke indicating that it will start to wind down the amount of support it gives to mortgage bond markets, towards the end of this year and 2014, has led to a sharp increase in swap rates, that has so far seen 5 Year money up 0.54% since the start of the month. Swap Rates are the mechanism by which lenders gauge the price of their fixed rate products and are linked to the price of Gilts. So any upwards movement will put pressure on lenders and their pricing.
Many analysts have made the point that whether banks and building societies start to increase the price of their fixed rate products will depend if they’re getting their funding from the markets or through the Funding for Lending Scheme. However it’s also worth mentioning there are mixed views from some notable market commentators.
Earlier this week the Bank for International Settlements (BIS) has said that central banks have done their bit to help economic recovery and now governments must do more. The BIS (known as the "central banks' central bank") has said it is time to end the "whatever it takes" approach, with a return to "strong and sustainable growth". The BIS also said that now the world was "past the height of the crisis", it was time for such interventionist policies to change. They argued that central bank action had borrowed "time for others to act, allowing them to repair balance sheets, to consolidate fiscal balances, and to enact reforms to restore productivity growth". They also claimed that the actions of the central banks had made it easy not only for the private sector to put off reforms, but also for governments to finance deficits more cheaply thanks to the low interest rates that had been created. Central banks must return their focus to maintaining financial stability and encouraging reforms, rather than "retarding them with near-zero interest rates and purchases of ever larger quantities of government securities".
Whilst the fixed rate market is experiencing a turbulent moment or two, the bank rate is still unlikely to move upwards from its record low of 0.5% anytime soon, and there’s even mention in the press this week about the possibility of a negative bank rate. MPC deputy governor Charles Bean was responding to request from the Treasury Select Committee, and pointed out that the MPC had always had the power to set negative bank rate, but said that the MPC believes that further asset purchases (QE) and targeted policies to restore the functioning of the monetary transmission mechanism, such as the Funding for Lending Scheme, represent more reliable tools for stimulating aggregate demand than a further reduction in the bank rate.
Then outgoing Bank Of England Governor Sir Mervyn King warned that world economies are "nowhere near" a return to "normal" interest rates. He added that the stopping of the stimulus measures and raising of interest rates would only come after a significant economic improvement and that the comments from the US Federal Reserve have been misinterpreted and that:"people have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn't.”
Whilst it’s hoped that Sir Mervyn’s comments may help to bring some calm to the volatility of the situation, it’s also unlikely that the statements by the Fed and BIS along with the spike in swap rates will lead to soaring fixed rates overnight. However what does appear to be very clear, is that anyone sitting on the fence waiting for a significantly cheaper rate is likely to be disappointed, and therefore should be make a decision asap.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.