Return to fixes as Libor rise hits trackers
Borrowers could increasingly opt for fixed-rate mortgages if the turmoil in the eurozone forces lenders to increase the cost of their tracker mortgages.
Lenders fund tracker mortgages either through savings deposits or monies borrowed off other lenders, the rate of which is determined by Libor.
Libor rates largely reflect the confidence that banks have in lending to one another. Factors such as the eurozone crisis will damage this, resulting in Libor, and ultimately lending rates, increasing.
Three-month Libor bottomed out in September 2009 at 0.54 per cent and has risen steadily since. Between August 26 and September 29, three-month Libor rose from 0.83 per cent to 0.94 per cent. This increase has started to filter through into tracker rate pricing. The average tracker reached a low of 3.4 per cent in March this year but this rose to 3.59 per cent at the end of September.
The most recent figures from the Council of Mortgage Lenders show the popularity of fixed rates has declined from an 18-month high of 64 per cent of mortgage sales in April to 60 per cent in July.
But brokers feel this trend will reverse and more borrowers will choose fixed-rate mortgages over trackers.
Chadney Bulgin mortgage partner Jonathan Clark says rising tracker prices will change the behaviour of both borrowers and advisers.
He says: “A week ago, if I was talking to someone who was buying a house for £500,000 and borrowing 60 or 70 per cent, I would have said it was a straight fight between a five-year fixed-rate at 3.5 per cent or a lifetime tracker at 2.5 per cent.
“But if the differential between those products shrinks, it will almost certainly mean a move away from trackers to fixed rates because the advantage of a tracker over fixed is going to be nominal and I think a lot of advisers will recommend a five-year fixed rate.”
Barclays has already increased the price of some of its lifetime trackers by up to 0.51 per cent. Emba group sales and marketing director Mike Fitzgerald says the media will draw attention to this and will play a part in convincing borrowers to opt for fixed rates.
He says: “When banks are unsure what is going to happen in the markets they put rates up. Uncertainty is probably the worst thing that you can have in a market. When the news comes out, especially in the consumer press, that tracker rates are to rise, people will start to shy away from trackers.
“I do not think this will do any harm to the remortgage market as the news that rates might start to rise might prompt people to enquire about fixed rates and at least then they will secure their repayments.”
The gradually increasing cost of tracker mortgages has come at a time when fixed rate mortgages have been cut to what is generally accepted as their lowest levels.
In the past year, the average five-year fixed-rate mortgage has fallen from 5.41 per cent to 4.73 per cent. The last couple of months has also seen the launch of the cheapest-ever five-year fixed rate from Chelsea Building Society, at 3.39 per cent, which was cut to 3.29 per cent.
While a five-year fixed-rate mortgage might not work out cheaper than an equivalent tracker mortgage over the term of the loan, the shrinking differential between the two now makes the benefits of a tracker seem less appealing, even in the current low base rate environment.
John Charcol senior technical manager Ray Boulger says: “Six months ago, the differential between variable and fixed rates was too much, but now I think fixed rates offer good value. I am not going to say fixed rates are going to be cheaper over the next five years but the cost of the security of that fixed rate is sufficiently low to make it good value.”
But Boulger adds that the cost of fixed-rate mortgages is unlikely to fall any lower. He says: “We might see a few more lenders cutting their fixed rates where they are not particularly competitive but in terms of getting any cheaper fixed rates than we have got now, I think that is pretty unlikely.”
However, All Types of Mortgages managing director Dale Jannels believes lenders’ appetite to lend in order to reach their end-of-year targets will see them cut their fixed-rate and tracker mortgages even further.
He says: “I would suspect quite a few lenders are way under target and it is becoming a pricecompetitive market. I think we could see rates come down even further to attract new business, in both fixed-rate and tracker mortgages.”
London & Country head of communications David Hollingworth thinks the price of tracker mortgages may continue to rise.
He says: “Libor has been creeping up very gradually. If you go back to 2008, the same thing happened. You had this crazy round of repricing as the cost of money increased on the market and lenders were constantly adjusting their prices to accommodate that. Obviously, we are nowhere near that level of volatility but Libor has been going up and it could lead to lenders further rethinking their trackers.”