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Interest Rate Speculation Fuels Short-term Deals

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Interest rate speculation fuels short-term deals

By Laurie Osborne, Editor

Published 25th May 2006, (a Thursday) at 09:45AM

Speculation in the City that there will be a base rate hike later in the year has forced up the cost of long term money in May, report Hamptons Mortgages.

Short term mortgage deals have continued to grow strongly this month at the expense of longer term fixed and variable rate deals.

Fierce competition from lenders such as Bank of Scotland and Birmingham Midshires has led to a slew of extremely low rate short term fixed and tracker deals coming onto the market in the past few months, although many of these are now coming to an end.

Following a steep decline in last month’s figures, buy-to-let is fighting back despite pressure on rental yields and the resurgence of the stock market. In contrast, home purchases, which had a record month last month (to March 31st 2006) have fallen from 48.37% of all Hamptons mortgage business to 43.57% in the latest figures.

Remortgages have seen a huge recovery over the last month after a substantial drop in March. Remortgages, as a percentage of all mortgage business, has increased from 20.73% last month to 29.88% in this month’s figures - a rise of 9.15%. However, this merely puts remortgaging levels back to an annual average.

Loan to value ratios have dropped this month on most types of mortgages. However, continued property price inflation has pushed up LTV ratios for home purchases, which have risen from 68.67% to 70.63%. This 1.96% increase mirrors the latest Rightmove figures which saw house prices increase by 2% in the last month.

Examining the savings that could be achieved from switching to the current best buy rates, Hamptons has calculated that the possible savings that could be made on a £100,000 mortgage have fallen in the last month.

Hamptons attributes this to the withdrawal from the market of many of the most competitive deals from major lenders such as the HBOS Group. The end of many specially fixed rates means that the gap between SVR and current best buy rates has finally begun to narrow, providing less incentive to switch lenders.

The Hamptons spring best buy mortgage tracker shows that the rates on best buy fixed rate products increased in April. The Bank of England inflation report released on the 10th May claimed that interest rates would have to go up in order to keep inflation down and the Government’s latest inflation figures are now predicting 2% inflation rather than the 1.8% stated before.

This has contrived to create a jittery atmosphere in the City over inflation and commodity prices with the effect of making swap rates more expensive. This, in turn, has forced lenders into changing their pricing structure, increasing upfront fees in order to maintain an attractive low rate.

Jonathan Cornell, director at Hamptons Mortgages commented: "Property prices have continued to grow, defying doomsayers’ predictions of a crash. There seems to be no let up in the British public’s appetite for home purchases, leading to a bumper month for many lenders."

"However, inflationary pressures and, what seems like an inevitable interest rate increase later in the year has contributed to a nervous atmosphere in the City, forcing up best buy rates and fees."

"It remains to be seen whether anti inflationary measures from the Bank of England or the Treasury will have a depressive effect on the property market."

Lots of mixed messages in there.


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