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No January sales at the swap shop

Guy Anker says rising swap rates are partly behind the decision by many lenders to pull their fixed-rate deals.

Lenders have been busy withdrawing fixed-rate mortgage deals due to rising swap rates and the huge demand that followed the quarter-point base rate rise.

It is not just the smaller building societies that have been forced to increase rates for borrowers before February, when the rises were originally expected to take effect. Many top 10 lenders such as Alliance & Leicester and Nationwide have also been quick to pull some of their rates.

The advice to brokers is to apply for fixed deals as soon as possible for their clients while decent rates are still available, as not all lenders have pulled their rates.

But there is a fear that, further down the line, brokers may not be able to offer attractive deals when clients come to the end of their current terms, which could lead to a contraction of business.

The Bank of England’s surprise decision to increase the base rate from 5 to 5.25 per cent came as swap rates – which set the price at which lenders buy money from the wholesale markets – also reached high levels.

Data provided by Woolwich shows prices for 10-year swaps stood nine basis points above base rate the day before the rise compared with just above 4.8 per cent in November, when base rate was also 5 per cent.

By the end of last week, two-year swap rates were just under 5.8 per cent.

John Charcol senior technical director Ray Boulger points out that swap rates were levelling out last week while adding that there is nothing revolutionary about lenders pulling their fixed rates in such an economic environment.

He says: “It is easy to see why lenders could have run out of funds with the rush to take out fixed rates since the announcement, unless lenders had bought money some while ago. So it was obvious that rates would be pulled or put up and it makes sense to get a fixed rate as soon as possible.”

He attributes rising swap rates partly to a belief in the City that another quarter-point rate rise could be on the horizon in the short term.

There have also been questions raised as to whether the Bank of England was aware of last week’s figures showing inflation in December reached 3 per cent compared with 2.7 per cent in November.

Lenders spent last week trying to work out how to price fixed rates at a point where they are attractive to borrowers, with the knowledge that some may have to be loss-leaders.

Hamptons International Mortgages technical director Jonathan Cornell says: “Over Christmas, swap rates have gone up without any base rate increase and they are a long way above base rate and seem to be chasing ahead. I think inflation and the housing market will start to cool down and we are inching to the top of the cycle but we have not peaked yet.”

What is clear is that the buoyancy of 2006 has been replaced by more of a cautious optimism for the year ahead. Brokers now have an added obstacle to growing their businesses, with the possibility of fewer attractive deals available to tempt clients.

Moneyfacts mortgage analyst Julia Harris says: “The next few months will be an interesting time. We could see short-term fixed rates of under 5 per cent vanish or alternatively see associated arrangement/ product fees increased in an attempt to keep them low, as lenders are forced to buy their funds at the now much higher rate offered by money markets.”

Moneyfacts has hinted that lenders’ reasoning for pulling rates is less genuine as some are making out, claiming that part of their motive is to ensure consumers do not get hold of cheap deals before February 1, when most variable and tracker rates are due to go up after the base rate rise.

That view has the support of Chase de Vere Mortgage Management but other brokers, notably Boulger and Cornell, insist that lenders’ hands have been forced by a mixture of surging consumer demand and high swap rates.

Around 20 lenders had pulled or repriced their fixed rates by last weekend, including some major lenders such as Alliance & Leicester and Nationwide.

A&L spokeswoman Sally Lauder says: “We ran out of funds. Swap rates are also very expensive so we will be repricing.”

Yorkshire Building Society had 60m in applications last weekend compared with 12m a day normally. Spokesman David Holmes says: “If we had known we would get that volume, we would have pulled the rates last Friday.”

Other lenders have not encountered such problems. HBOS spokesman Paul Fincham says the environment is no more challenging than any other month.

Abbey says it has no plans to reprice its fixed rate deals just yet while Britannia has pledged not to pull any of its fixed-rate products until February 1.

Britannia member business director Tim Franklin says: “While other lenders have been pulling their fixed-rate products following the base rate increase, we have decided against that move.

“The last increase was unexpected and we want to provide a little bit of certainty for people in a time of uncertainty.”

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