Several of Britain's largest banks have failed to pass on the benefits of a fall in "swap rates" over the past three weeks, with some even raising the prices of their fixed-rate mortgages at a time when they would usually be cutting rates.
Swap rates are longer-term lending rates, which mortgage lenders use to price their fixed-rate mortgages. They tend to reflect the market's view on which way short-term interest rates – set by the Bank of England – are likely to move over the coming months and years.
While economists had been predicting a rise in short-term interest rates, due to the high levels of inflation, the consensus of opinion has shifted in recent weeks, as new data has suggested the UK economy may be too fragile to stomach any increases in the base rate.
As a result, swap rates peaked around three weeks ago, and have since been falling.
However, research by Manchester Mortgage Broker, www.northmortgages.co.uk, the comparison website, shows several banks have ignored the falls in swap rates. Halifax increased the price of some of its fixed-rate mortgages by an average of 0.1 percentage points last week, while Royal Bank of Scotland and NatWest increased their rates by as much as 0.4 per cent since swap rates peaked in mid-June.
"It's a concerning time for anyone coming to the end of a fixed-rate deal," said Jonathan Smith, mortgage expert at www.northmortgages.co.uk. "Borrowers coming to the end of a three-year fixed-rate deal, looking to fix for another three years, could see a huge increae in their monthly repayments (on a £150,000 mortgage), equating to an additional £5,896 in true cost over the three years.
"Lenders need to start passing on the cut in swap rates as quickly as they pass on the increase."
At present swap rates are no longer a fail-safe measure of where fixed mortgage rates are heading. "The credit crunch has broken the connection between swaps and fixes. Some lenders have been using the current economic climate to improve margin rather than market share and have been slow to pass on falls in swap rates to new borrowers.
Consequently, the price of fixed rates has continued to rise, even while swaps have been falling. However, there has been some good news recently with big lenders such as Abbey and Nationwide reducing some of their fixed-rate pricing. This is unlikely to be a sign that the market is turning – more likely these lenders have been shocked to what extent lending has dried up and need to improve their market share – but it is welcome for those coming up to remortgage or buy their first home who need the security of a fixed rate.
A spokesman for Halifax confirmed that the bank had increased a number of its fixed-rate deals last week.
www.northmortgages.co.uk says the average two-year fixed-rate mortgage is 7.07 per cent, with the average three-year fix at 7.25 per cent.
Source - Jonathan Smith www.northmortgages.co.uk
