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Fixed Rate Mortgages Rising Fast

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Fixed rate mortgages rising fast

As we have warned before, you may be paying only 2.5% or less for your mortgage now – but it won’t last.

Swap rates which determine the rate at which mortgage lenders set their fixed rates have jumped massively because the markets expects the chancellor to experience increasing difficulty funding the £200 billion he needs to borrow to balance the books.

Gilt yields and swap rates reached their recent lows on May 14th, the day after the publication of the Bank of England’s Quarterly Inflation Report, and in just over three weeks since then three and five year swap rates have surged by a massive 0.62%.

The upshot is that Nationwide is massively increasing the cost of some of its fixed rate mortgages from Friday. All its fixed rates are increasing, with the biggest hike being 0.86% on one of its five-year fixes. A 0.86% rate increase on a £150,000 interest only mortgage will increase the total cost over five years by £6,450 – a figure you can’t ignore.

Two year fixes are going up by between 0.16% and 0.61%, three year fixes by 0.2% and 0.26% and five year fixes are jumping by between 0.2% and 0.86%. It is only a matter of time until other lenders follow suit.

Nationwide’s current rates are around 4.18% for a two year fix and 3.99% for a three or five year fix. An increase of 0.86% will push the three and five year rates to 4.85% - still reasonable but not as good as it has been. Some borrowers will be kicking themselves for missing the boat.

‘There is no obvious pattern to which rates are going up most,’ commented Ray Boulger of mortgage broker Charcol.

‘For example on two years it is the rates for the higher loan to values, whereas on for five years the biggest increases are on the rates to 60% LTV and the smallest on the rates to 85% LTV.’

Boulger believes that these large and varied increases indicate that either Nationwide wants to rebalance its mix of business or it has reassessed the relative risks of different types of business, or perhaps both. It may also simply indicate that it wants to reduce the overall amount it lends.

Boulger believes that there is now a small window of opportunity for homeowners to remortgage onto relatively cheap fixed rates. ‘I expect several lenders to increase the cost of at least some of their fixed rate mortgages over the next few days.’

‘With most borrowers – including around 80% of our clients - currently choosing a fixed rate mortgage, if interest rates continue to rise then the current recovery in the housing market, which is based primarily on much improved affordability as a result of the combination of lower house prices and lower interest rates, may well wobble. The message for borrowers wanting to take a fixed rate is clear; get in now or miss out on the current relatively low rates,’ Boulger warns.

There is still some comfort for those borrowers looking for a tracker rate as there is no reason for lenders to increase tracker margins just yet. They have already increased them dramatically since the credit crunch hit from trackers at 1% below Bank Base Rate to today’s rates of around 2% to 3% above BBR. When BBR starts to rise, their profitability is already locked in.

‘However, lenders with particularly competitive tracker rates may still increase them if they want to reduce the volume of applications they receive. For example, Woolwich is increasing the cost of one of its trackers by 0.5% - a particularly competitive and indeed market leading offset lifetime tracker at Bank rate plus 1.99%,’ says Boulger.

And he issues a dire warning for the government and the economy – echoed by many others. ‘These changes in both swap rates and short dated gilt yields happened at a time when the Bank of England’s Quantitative Easing programme is designed to drive down yields and it presents the Prime Minister, The Chancellor and the Bank of England with a major problem.’

‘Having pushed Bank Rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the Government is impotent in this area and has lost control of interest rates except at the very short term end.’

Recovereh.

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