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markyh

Fixed Rate Mortgages, Swap Rates And Bond Yields

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There has been a lot of excitement recently on here about the end of sub 5% fixed rate mortgages because "swap rates" and "bond yields" are rising. I am trying to understand this but even through googling and reading wikpedia's explanation I am a little confused.

I always thought banks got low variable interest loans from Japan banks at say 1% for UK fixed rate mortgages and just gambled on the £ / Yen exchange rate for their interest payments but sold them to UK consumers at 4.5 to 5%? but then this UK swap rate thing keeps now getting mentioned?

I assume for a bank to lend on fixed rate mortgages for say 5.5% it must be covered by it's own fix rate less than this, or have some kind of bank capped rate protecting it as if it just borrows off the BOE at base rate it takes a big risk.

So how do the swap rates on sites like swap-rate.com etc work basically? I assume that banks must always set a fix rate loan 0.25- 0.5% above the rate they get to make a profit, but it seems the UK swap rate is about 6.3% now, but fix rates are not 6.6- 6.8% yet? Is their a lag due to big swap rate deals like say £100m swaped at 5.7% still being sold into the UK mortgage market?

Help, am having a boys drink with my close mates later in the month and want to help explain why I am STR as they all have £150k to £300k mortgages taken out in the last 18 months or less on fixed deals, all with existing fixed deals ported over from 2004 /2005 and new late 2005 / 2006 fixed deals added on. So I want to explain to them where their fixed rate deals could be headed in the next 2-3 years.

cheers

Mark

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There has been a lot of excitement recently on here about the end of sub 5% fixed rate mortgages because "swap rates" and "bond yields" are rising. I am trying to understand this but even through googling and reading wikpedia's explanation I am a little confused.

I always thought banks got low variable interest loans from Japan banks at say 1% for UK fixed rate mortgages and just gambled on the £ / Yen exchange rate for their interest payments but sold them to UK consumers at 4.5 to 5%? but then this UK swap rate thing keeps now getting mentioned?

I assume for a bank to lend on fixed rate mortgages for say 5.5% it must be covered by it's own fix rate less than this, or have some kind of bank capped rate protecting it as if it just borrows off the BOE at base rate it takes a big risk.

So how do the swap rates on sites like swap-rate.com etc work basically? I assume that banks must always set a fix rate loan 0.25- 0.5% above the rate they get to make a profit, but it seems the UK swap rate is about 6.3% now, but fix rates are not 6.6- 6.8% yet? Is their a lag due to big swap rate deals like say £100m swaped at 5.7% still being sold into the UK mortgage market?

Help, am having a boys drink with my close mates later in the month and want to help explain why I am STR as they all have £150k to £300k mortgages taken out in the last 18 months or less on fixed deals, all with existing fixed deals ported over from 2004 /2005 and new late 2005 / 2006 fixed deals added on. So I want to explain to them where their fixed rate deals could be headed in the next 2-3 years.

cheers

Mark

http://www.telegraph.co.uk/money/main.jhtm...26/cmloan26.xml

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Interesting but I was looking for a more in depth explanationwith simple examples that invloved the current rising july 2007 swap rates, and also how bond yileds tie up in all this?

I know that fixes under 6% without huge fees (I read profit margin for lender rather than arangment fee true cost) are non existant now.

I have a mortgage illustration from Nationwide from October 2005 where we where offered £170k to buy a £250k house fixed at 4.69% for 5 years. The fixed repayments where £963 a month.

But we decided to wait and have our wedding first, then our daughter arrived 1 year ago. Now we are married but those houses are £300k, stamp duty will cost £9k rather than £2.5k, will will need a £200k mortgage after selling our house and a 5 year fix with Nationwide in 5.98%!! So our repayments will cost £1300 p/m for 5 years.

So I was just interested in how likes of the Nationwide have increases fixed rates from 4,69% to 5.98% becuase of "swap rates". I.E., who sells swap rates to who, how do they work, what affects their cost other the the BOE base rate, surely aren't all lenders affected but IR rises so how can say HBOS sell better fixed loans to Nationwide than they get themselves etc.

M

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The consensus at the turn of the year from economists was that the base rate would be cut midway through the year. That is far from certain, with swap rates failing to react to lower than anticipated inflation figures last week

Hmm, don't seem to have been any cuts yet. I predicted a rise, does that mean I know more about the real world than these 'economists'?!

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I had a conversation at this time with a PhD uberbrain mathematician who sold his soul to the city (for a pretty sum) and now trades in currencies for a living.

He was adamant that interest rates would stay the same for a couple of months, then fall a quarter of a percent.

I said that inflationary pressures were going to ensure that there would be a rise later in the year.

It's nice to know that really smart people who are paid lots of money are no righter than less smart amateurs like myself :)

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I had a conversation at this time with a PhD uberbrain mathematician who sold his soul to the city (for a pretty sum) and now trades in currencies for a living.

He was adamant that interest rates would stay the same for a couple of months, then fall a quarter of a percent.

I said that inflationary pressures were going to ensure that there would be a rise later in the year.

It's nice to know that really smart people who are paid lots of money are no righter than less smart amateurs like myself :)

"Intellectual capacity is no guarantee against being dead wrong" - Carl Sagan.

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Interesting but I was looking for a more in depth explanationwith simple examples that invloved the current rising july 2007 swap rates, and also how bond yileds tie up in all this?

I know that fixes under 6% without huge fees (I read profit margin for lender rather than arangment fee true cost) are non existant now.

I have a mortgage illustration from Nationwide from October 2005 where we where offered £170k to buy a £250k house fixed at 4.69% for 5 years. The fixed repayments where £963 a month.

But we decided to wait and have our wedding first, then our daughter arrived 1 year ago. Now we are married but those houses are £300k, stamp duty will cost £9k rather than £2.5k, will will need a £200k mortgage after selling our house and a 5 year fix with Nationwide in 5.98%!! So our repayments will cost £1300 p/m for 5 years.

So I was just interested in how likes of the Nationwide have increases fixed rates from 4,69% to 5.98% becuase of "swap rates". I.E., who sells swap rates to who, how do they work, what affects their cost other the the BOE base rate, surely aren't all lenders affected but IR rises so how can say HBOS sell better fixed loans to Nationwide than they get themselves etc.

M

Right.

Your first post mentioned Yen carry trade to fund mortgages. Using these funds to buy a fixed income debt (FR mortgage) is risky in return for a yield less than a short term treasury bond.

The yield on bonds is determined by the market. The yield implies the direction IR will take from purchase to maturity of the bond.

The swap rate is a fixed IR that one party will swap with the other party for a floating rate (libor). It allows one party to meet liabilities by receiving a fixed income while paying a floating rate to the other. Say you go to a bank and ask for a 6% swap on a sum of money. You will pay the bank the difference between the base rate and the swap rate. If the base rate goes above 6% they pay you the difference. It's a way of hedging.

Swap rates are the rates banks charge each other. Therefore all other lending is based upon this rate.

Bonds and swaps are two different markets but they are affected by the same fundamentals.

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