No surprises from MPC but mortgage rates head south

Ray Boulger of leading UK mortgage broker John Charcol comments on the news that the Monetary Policy Committee has left Bank Rate and the Quantitative Easing (QE) programme unchanged this month. "It seems probable that Bank Rate will remain at 0.5% until well into next year and that any policy changes announced by the MPC will focus on its QE programme or involve some other radical new policy."

Boulger continues, "Seasonal factors resulted in August being, as usual, a relatively quiet month for mortgages - even by this year's standards - and it was the first month for a while that some lenders failed to hit their lending targets. This, coupled with lower Libor and swap rates, has resulted in some lenders making modest cuts in their mortgage rates which can only be good news for consumers.

"Despite some lower mortgage rates, lenders' average gross margins have widened further over the last month. In addition the rate cuts have primarily been focussed on loans with lower LTVs, with HSBC's new 2 year discounted rate to 90% LTV at 3.89% being an honourable exception. 3 and 6 month Libor rates have fallen around 0.2% in the last month to new record lows, with the 3 month rate now at 0.64% and 6 months at 0.86%. Libor is at last back to the level it averaged for many years prior to the credit crunch with a 0.14% margin above Bank Rate for 3 months.

"With the average time from application to completion currently being pretty protracted, any bank or building society which needs to increase its lending volume to hit its 2009 target really only has until the end of this month to take on borrowers which have a reasonable chance of completing their loans this year. While you would be forgiven for thinking that this might result in a surge of tactics to secure business, unfortunately most lenders are still more interested in restricting lending than taking advantage of the lack of competition to write more business on margins that they would have died for two years ago.

"However, another positive sign that the money markets are easing is that over the last month swap rates have fallen more than gilt yields. For example the 5 year swap rate is 0.39% lower on the month at 3.40%, whereas the yield on the 5 year benchmark gilt has only fallen by 0.27% and the margin between gilt and swap rates has narrowed even more for the longer periods. Although most lenders who are active in the market are offering 5 year fixed rates, there is a real dearth of offers over 5 years, even from lenders who in the past have consistently offered longer term fixed rates. For those borrowers looking for a fixed rate it is important to have the option to fix for longer than 5 years and so hopefully this improvement in longer term swap rates will encourage some lenders to re-enter that sector of the market.

"Most of the house price statistics are now recording price increases, and Nationwide's real, i.e. non seasonally adjusted index, has risen 4.7% in the first 8 months of this year. The longer that prices keep rising, the more confidence returns to potential buyers, and the expectation that interest rates will remain low for longer than most people expected prior to last month's MPC meeting is good news for the housing market, although our severe economic problems are still acting as a dampener to significant price increases. I now expect house prices as measured by Nationwide to be within 0.5% of unchanged on a year on year basis next month and to show a rise over 2009 of 6 - 7%. The Land Registry index, which is based on completions and hence lags about 2½ - 3 months behind the Nationwide figures, is likely to be very close to break even in 2009."

What should borrowers do now Ray?

"With the cost of fixed rate mortgages not fully reflecting the sharp drop in swap rates over the last month, tracker or discount rates continue to look more attractive for those borrowers who don't need or want the security provided by a fixed rate. However, as it is more than usually difficult to know when the time will be right to switch to a fix, it is important to retain the ability to switch without incurring significant early repayment charges. This means buying a tracker or discount with no, or low, early repayment charges (ERC) or one which offers a droplock option, allowing a switch to a fix without incurring the ERC. HSBC, Woolwich and Abbey are among lenders which offer such deals with no, or a low, ERC, and all of Nationwide's trackers have a droplock option, allowing its borrowers to switch to any of its fixed rates without incurring an ERC. Last month the proportion of our clients choosing a fixed rate fell well below 50%. In addition Nationwide is tomorrow launching 2 year trackers with no ERC up to 80% LTV and cutting rates for purchases on its fixed and tracker rates up to 75% LTV."