Brokers are confident most lenders will “weather the storm” of volatile swap rates, but believe smaller and more specialist players may be forced to hike or pull fixed rate deals.
Swap rates, the rates banks borrow at, which feed into mortgage pricing, jumped last month prompting a flurry of changes to fixed rate mortgages.
When Federal Reserve chairman Ben Bernanke announced on 19 June the US central bank’s quantitative easing programme could end by the middle of next year, two-year swaps were at 0.84 per cent and five-year swaps were at 1.38 per cent. His comments prompted two-year swaps to jump to 1.01 per cent and five-year swaps to hit 1.85 per cent in the space of five days.
Over the last few weeks Paragon Mortgages has pulled its entire range of fixed rate buy-to-let deals, while Platform has increased its rates on two and five-year deals by up to 0.68 per cent, with both lenders citing climbing swap rates. A clutch of building societies including Skipton, Newcastle, Coventry and Cambridge have all pushed up the cost of fixes over recent weeks. Lloyds Banking Group subsidiaries BM Solutions and Halifax Intermediaries also announced rate hikes of 0.2 per cent on selected fixes last week.
The increase in swaps has prompted speculation that the tide could be turning on fixed rate deals, with lenders looking to push up costs or pull their rates altogether.
But more recent swap movements seem to tell a different story. Swaps begun to tail off in the first week of July at 0.87 per cent and 1.59 per cent respectively. While still much higher than in previous weeks and months, swaps do appear to at least be flatlining.
Chadney Bulgin mortgage partner Jonathan Clark believes there are factors at play which will keep fixes relatively low.
He says: “Even if the cost of funding goes up, given the lenders are all desperately trying to increase their market share they will probably artificially keep rates down to try and hoover up some business.”
John Charcol senior technical manager Ray Boulger says the fact that swaps are above where they have been historically means fixed rates are unlikely to go any lower. But he notes a lot of lenders have chosen to ignore swap rate volatility and have not hiked rates.
He says: “Most lenders have got quite aggressive lending targets, and some of them are behind on them. In reality to hit their 2013 lending targets, business needs to be written by ideally the end of September but at the latest the end of October. The last thing lenders will want to do, six months into the year, is take their foot off the pedal and risk getting further behind on their targets or falling behind when they have a current good track record.”
Chartwell Funding managing director Robert Winfield says: “There is still plenty of margin in mortgage pricing for lenders. The decent fixed rates that are out there at the moment I think will be around for a little bit longer yet. Swaps have spiked up but seem to be edging back again, so hopefully lenders will be able to weather the storm and ride out the volatility.”
Clark believes press commentary in Sunday supplements that fixed rates may not be around for much longer has fuelled a “buy now while stocks last” mentality among clients, which he says is obviously a boon for brokers.
He argues the Funding for Lending scheme may also serve to keep fixed rate deals relatively close to where they are now.
Clark says: “Only a fraction of what is available to lenders through the FLS has actually been drawn down. Rates have already been driven down to low levels, so even if rates were to go up by 0.25 or 0.5 per cent, it would not be disastrous for the market, it would just be a bit of a reality adjustment.”
But the way the FLS operates could work against smaller and more specialist lenders. By virtue of their size, smaller lenders access smaller tranches of funding, while specialist lenders cannot access the scheme as funds are limited to firms that take deposits. This is reflected the types of lenders who have increased their fixed rates.
Mortgage Advice Bureau head of lending Brian Murphy says: “The fact that Paragon decided to withdraw its fixed rates after swap rates jumped is partly a consequence of not having access to the FLS, putting specialist lenders at a competitive disadvantage.
“However, we have seen the market collectively draw breath after the initial waves caused by rising swap rates. Thankfully, although swaps are not yet back where they started, the situation appears to have calmed.”
As for the lenders themselves, they are typically cagey on revealing commercially sensitive information about the direction of travel on pricing. All they will say is they constantly review their pricing on many factors, including swaps, and there may be changes they need to make. But it may be that we have seen the extent of the changes to fixed rate deals, for now at least.