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Swap shop for fixes

Guy Anker analyses whether trackers are set to take over from fixed rates

Fixed-rate mortgages are set to go out of fashion over the next few months and be replaced by trackers.

Several commentators say that high swap rates are pushing fixed rates to such a level that they may become uncompetitive because of borrowers’ obsession with headline rates,

Platform, which has been one of the most vocal lenders on this point, has launched a new buy-to-let three-year tracker at 0.28 per cent above base rate, which it claims is one of the lowest rates available in the sector.

Woolwich recently offered a lifetime tracker at 0.19 per cent above base and a two-year discount tracker at 0.12 per cent below base and claims it could not get anywhere near those rates on a fix in the current market.

But not everyone agrees with Woolwich’s view that best value is to be found in trackers.

London & Country spokesman James Cotton says: “I think it is a load of rubbish to say fixed rates are uncompetitive and that trackers are the way forward.

“It is no good to tell people that trackers are better because if interest rates go up they could be more expensive. You may have to pay a little more on a fix but it could end up being more beneficial. You also get more security with a fix.”

Purely Mortgage chief executive Mark Chilton agrees: “If the base rate goes up, then trackers will become more expensive over a two-year period than fixed rates so I am not sure whether trackers are necessarily a better buy.”

But the broad consensus is that swap rates have risen to such a level that the cost for lenders to buy money from the wholesale market is getting more expensive which has an impact on fixed rates.

Figures released last week by the Council of Mortgage Lenders show a slight decline in the popularity of fixed-rate loans from 70 per cent of all mortgages in February to 69 per cent in March.

But those figures do not take into account recent fluctuations in the market and comments about the potential decline in fixed rates have only started to surface to any great degree over the past few weeks, meaning we will have to wait a couple of months before assessing whether this is filtering through into the market.

John Charcol senior technical director Ray Boulger believes only 35-40 per cent of mortgages will be fixed rates in a few months while Platform head of marketing Paul Hunt thinks the figure will be closer to 50 per cent.

Another debate centres on how long the current trend will last. Chilton predicts that we could see trackers having a more competitive headline rate for another six months and Boulger says this could go on until the end of the year.

Woolwich head of mortgages Andy Gray says: “Rapidly increasing swap rates, pushed higher by a view that base rates will rise this year are having the effect of making fixed-rate products increasingly expensive to put together, making the rates uncompetitive.”

Hunt says: “The cost of fixed rates has been very cheap over the last few months and we have had 80 per cent of our business on fixes. But there is clearly change taking place and we could not have come out with out new buy-to-let product on a fix.”

Boulger says: “Swap rates have been going up steadily for a couple of months and risen 20 basis points over the last two weeks which is further than I expected.

“Because consumers are more headline rate-conscious, once price moves towards a quarter per cent difference you will find some will move towards trackers, and the gap widens the longer the term. It is unlikely base rates will go up enough to make fixed rates cheaper.

“There are a few cheap two-year fixes in the market, with the cheapest being Cheltenham & Gloucester, but by June, there will a half a point difference and at that level the reality is that people will look at the headline rate, although it is not always wise to just look at the headline rate.”

Some commentators believe the Bank of England’s decision recently to hold interest rates at 4.5 per cent, where they have been since August last year, is having an effect on the market.

Home of Choice mortgage director Mal McConechy says: “This is the ninth month in a row with no interest rate movement and it was not like that a couple of years ago but swap rates have been rising in the background.

“The cost of buying money has been going up which suggests there will not be a cut in interest rates in the coming months.”

McConechy says that is also having an effect on lenders that reduce their headline rates to get to the top of the best-buy tables. That practice recently drew fierce criticism from BBC Money Box presenter Paul Lewis who slammed lenders at a Council of Mortgage Lenders’ lunch, claiming they hide fees and complicate products to draw in customers.

He thinks that tactic could come back to bite in the current climate. He insists: “Lenders that want their name at the top of the best-buy tables and search engines might end up being under the water more if the swap rates rise and they keep the product on the market for a month or so.

“If they take the product off the market, then they may only have had it on for a few days. Lambeth Building Society recently had a product that lasted only 24 hours which shows you what can happen.”

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