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Swap shop

Samantha Downes explains how falling swap rates have allowed lenders to lower fixed rates this month, reflecting optimism that the base rate has peaked for the moment

Borrowers are being tempted to lock in their mortgage repayments with cheaper fixed deals.

At least 10 lenders have lowered their fixed rates in the last fortnight, some by as much as 0.4 per cent. This has resulted from a fall in long-term swap rates, which are money-market instruments used to fix the interest paid by banks when they want to borrow big amounts of cash. The savings are passed on to borrowers via repriced fixed-rate deals.

F&C sterling enhanced cash fund manager Jason Kabel says the global turmoil triggered by the US subprime crisis has led markets to believe that further base rate rises are less likely.

Lower than expected inflation data has also increased speculation that the Bank of England’s monetary policy committee will keep rates on hold for the time being.

In August, the consumer prices index fell to 1.8 per cent from 1.9 per cent in July. However, the retail prices index – which includes mortgage repayments – rose to 4.1 per cent from 3.8 per cent.

Kabel says the swap price is determined by the base rate and expectations of whether it will rise or fall. “Borrowing is starting to get cheaper, despite the turmoil in the US,” he says.

Fixed rates are nowhere near the lows of a few years ago but are becoming more competitively priced than variable rates. Lenders which have reduced their rates recently include Alliance & Leicester, which has lowered its fixed rates by up to 0.11 per cent, Bank of Scotland by 0.15 per cent, Derbyshire Building Society by 0.2 per cent and Mortgage Express by up to 0.1 per cent.

Woolwich has reduced some of its rates by 0.4 per cent and recently brought out a 10-year 5.59 per cent fixed deal. HSBC-owned First Direct has lowered the rate of its 10-year fixed-rate offset loan from 6.49 to 6.25 per cent.

Woolwich head of mortgages Andy Gray says the firm is looking at repricing its short-term rates. He says longer-term swap rates fell by 0.5 per cent between July and August, allowing lenders to reduce their longer-term fixes.

He says: “That is trickling through to short-term swap rates and I expect that a lot more lenders will reduce their short-term fixed-rate products in the next few weeks.”

However, Gray says many borrowers coming off cheap fixed rates this autumn will get a shock. “Many of them may have taken advantage of rates as low as 4.5 per cent a couple of years ago and possibly some will even be paying 3.5 per cent although those are in the minority,” he says.

Skipton Building Society has relaunched its range of fixed-rate mortgages with deals starting at 5.49 per cent. Two, three, five, seven and 10year rates have been reduced.

General manager Steve Aldous says: “The maximum payment for a customer taking out our seven-year fixed rate at 5.99 per cent on a £100,000 repayment mortgage over a 25-year term would be £627.81 a month.”

Globally, there are signs that the money markets may be stabilising. The Libor – the rate at which banks borrow from one another – dropped to 5.87375 per cent in mid-September after peaking at 6.2475 per cent on September 3. The three-month Libor has fallen from 6.9025 per cent to 6.88 per cent in the last week.

Moneyfacts analyst Lisa Taylor says: “Lenders are reducing fixed rates because it is cheaper for them to borrow money but, aside from that, there are very few product launches at the moment. Things are very quiet.”

She says the fall in fixed rates may be irrelevant as lenders have started to tighten up their criteria. She says: “Lenders may be reducing rates but they may be putting on extra charges or increasing penalties.”

Skipton’s 10-year fix comes with a £1,999 arrangement fee and the Woolwich’s with a £995 fee.

Taylor says: “Some lenders are always aiming for the best-buy charts and many lenders will always be chasing new business, no matter what.”

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