We thought this week therefore presented a good opportunity to review mortgage pricing over the last year. The extent of the ups and down's - particularly in the fixed rate market may surprise you!
Ups and downs in fixed rate pricing
Timing has proved to be everything in 2003/4 for mortgage borrowers. Base Rate has increased by 1% since November - but swap rates (upon which lenders base their fixed rate pricing) have been yo-yoing for longer and by significantly more than that. The extent of the change is demonstrated by the fact that Cheshire BS offered a 25 year fix in August last year with a
payrate of 5.14%. Less than a year on, this rate is now lower than the cheapest nationally available 2 year fix, which is at 5.19%.
The irony is that this swing has occurred during the time in which the industry was talking and discussing the implications of the Miles' review into the availability of long term fixes. However it would be prudent to remember that what goes around, comes around, and during it's 25 year life cycle there will probably be times when the Cheshire deal will be more expensive than short term fixes. This is why the option to redeem penalty free every other year after 6 years is so important.
There is now only one 25 year fixed rate on the market and this is from Leeds & Holbeck. They have just increased the rate on their product from 5.99% to 6.39% after funds were exhausted at 5.99%. At 6.39% this mortgage currently looks an expensive way of buying long term security.
Have fixed rates peaked?
Fixed rates tend to reflect the old adage that what goes up must come down. Sure enough, for the first time in nearly a year swap rates in the second half of last week started showing month on month falls, and these have now extended to falls of around 0.2% for 2 - 10 year swaps. This is perhaps an indication that the markets have pushed longer term rates up as far as they are likely to go and adds to the rationale of why we are suggesting that fixed rates now look expensive. If swap rates continue to ease, this could herald a new batch of slightly cheaper fixed rate deals in the coming weeks.
Advice to borrowers - Capped trackers look appealing...
The current 3 and 5 year fixes on offer look so uncompetitive at present (with rates starting from 5.34% and 5.39% respectively) that equivalent capped tracker deals for the same period are currently much better value.
The beauty of a competitive capped tracker for 3 - 5 years is that the pay rate starts lower than the cheapest fix and although it is likely to rise above the fixed rate for a period, the borrower will benefit again when rates start to fall, which will probably happen even during the life of a 3 year deal. This provides considerable comfort to borrowers. In exchange for at worst paying only a slightly higher rate for part of the term of their deal than they would on a fix for a comparable period, they have the comfort of knowing that not only will they never be locked into an uncompetitive fix but they will also benefit when rates fall.
