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Swap rate spikes prompt fixed rate price warning

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Boulger: ‘This reinforces the message that fixed rate pricing is on the floor’

A sharp spike in swap rates has prompted warnings that borrowers could face more expensive fixed rates if they wait around for pricing to fall further.

A sharp spike in swap rates has prompted a warning that fixed rate pricing has bottomed out and borrowers could miss out if they wait to secure a mortgage.

Between 12 and 14 August, two-year swap rates have jumped 7 basis points to 0.84 per cent, while five and 10-year swaps have rocketed by 17 and 15 basis points to 1.75 per cent and 2.76 per cent, respectively.

Perhaps surprisingly, swap rates remained fairly static in the days after new Bank of England governor Mark Carney last week announced his decision to introduce “forward guidance” on the potential movement of base rate.

He announced the BoE would not increase base rate from a record-low 0.5 per cent until the UK’s unemployment rate fell below 7 per cent, or if inflation spikes.

John Charcol senior technical manager Ray Boulger says the spike witnessed in the past two days could be the market “reassessing” reaction to the announcement.

He adds: “This all reinforces our recent message for borrowers, which is that fixed rates are on the floor and for most people there is little or nothing to be gained by waiting for lower rates.

However, for those looking to remortgage, increasing property prices, a trend likely to continue for at least two years, will enable some homeowners to benefit from the cheaper rates available at lower LTVs, especially if they are on a repayment mortgage and/or overpaying.

Depending on the rate they are currently paying, borrowers in this situation may benefit from waiting a short while to enable them to take advantage of the better rates available at lower LTVs. However, this strategy runs the risk that rates will rise before the lower LTV is achieved.”

Over the past few weeks the picture for fixed rate pricing has been mixed with some lenders cutting their rates while others have increased theirs. 

However, yesterday Halifax increased its five-year fix from 2.45 per cent to 2.69 per cent, although it has reduced the fee by £500 to £1,760. Furthermore, Principality Building Society pulled its market leading five-year fixed rate of 2.99 per cent up to 75 per cent LTV.

Swaps, which lenders use to hedge potential interest rate rises and are closely linked to mortgage pricing, spiked in June after the US Federal Reserve hinted it could wind up its programme of quantitative easing.

Five-year swaps peaked at 1.85 per cent on 24 June, while two and 10-year swaps peaked at 1.01 per cent and 2.75 per cent, respectively, on the same day.

Since then, however, swaps had settled, with two, five and 10-year rates falling back to 0.72 per cent, 1.43 per cent and 2.54 per cent, respectively, at the start of August.

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