“Last week saw some interesting product launches with the introduction of several five-year fixed rates below 3%.
“HSBC and Santander went head to head with their 2.99% products and Skipton Building Society also chose this week to re-launch their seven-year fixed rate.
“Halifax, Nationwide and Woolwich have all cut their rates this week too.
“These moves arrive in the wake of the launch of the Bank of England's funding for lending scheme designed to push £80bn worth of loans to mortgage borrowers and businesses and reward banks for lending more.
“Mortgage rates have inched up according to the BoE statistics but the evidence from the best buy tables will tell you a different story.
“While the BoE figures show average five-year fixes at the 75% loan-to-value benchmark increased from 4.17% to 4.3%, the best five-year fixed rate on offer went from 3.19% to 3.84%.
“Many lenders have blamed rising costs as the reason behind lifting rates in recent months - with banks’ caution about lending to each other in the money markets, more expensive regulatory burdens and a sheer lack of available funding all contributing to these rate hikes too.
“Despite this there have been sharp falls in the measures of the cost of funding on the money markets, which lenders use to varying degrees alongside savers’ deposits for mortgages.
“Swap rates - which heavily influence fixed rate mortgages - have fallen on low expectations for when interest rates will finally rise.
“Five-year swaps are down to 1.04% from 1.76% in mid-March and 2.3% a year ago. They stood at 3.07% on 5 April 2011.
“Money markets now forecast the first increase from the record low 0.5% base rate may come as late as March 2017 - this has been pushed back from the end of 2014 in early May.
“After this base rate is expected to rise slowly and gradually as the BoE fears damaging the weak recovery. This revision has led money market swap rates - which influence fixed rate mortgage costs - to slip back.
“Banks’ and building societies' mortgage borrowing costs will be driven down even further if they decide to use the BoE’s FLS.
“This will essentially allow them mortgage funding at the base rate plus 0.25% - currently 0.75% - for four years.
“This opportunity will run for 18 months from 1 August. Banks will initially be able to get £1 for every £20 worth of lending they currently have to homeowners and businesses - and get more cheap money if they boost lending.
“The fact that this FLS will last for up to five and a half years suggests that the BoE expects the banking system to remain under pressure for most if not all of that period, with the implication that bank rate is likely to stay at 0.5% for most of this period.
“However at the moment mortgage lenders' levels of confidence and their access to funding are equally important to rates.
“This has meant demands for big deposits and has resulted in high margins on mortgages above money market rates.
“If confidence increases in the economy the banking sector and the outlook for house prices, lenders will find it easier to raise funding and borrowers can expect rates to come down and deposit requirements to ease.
Fixed or Tracker?
“Borrowers face a tough decision on this as fixed rates still remain comparatively expensive in comparison with tracker deals.
“Fixed mortgage rates have risen the most while tracker mortgage rates sit slightly higher than they have been but are back to being considerably lower.
“The consensus is that there will be no dramatic sudden increases. However, these forecasts are no guarantee that rates won't rise - and when rates rise trackers will get more expensive.
“Borrowers needing security should consider the extra cost of a fix as worthwhile. If they are taking a tracker because they can’t afford the equivalent fixed rate they are putting themselves in a very dangerous position.
“For those remortgaging or buying and who are able to take their mortgage with them, if they don't need to act right now, i.e. they are on an existing low tracker rate or guaranteed standard variable rate, it might be worth keeping the cheap deal - just remember it’s taking a punt on low rates and so setting aside some savings is a wise move.
“Tracker rates look good right now. They are substantially cheaper than fixes but they should come with a health warning as essentially they are a gamble. What looks like a bargain rate now could soon get very expensive when interest rates rise.
“Anyone considering a tracker needs to make sure they are not just storing up a problem for the future. If the tracker comes with an early redemption charge that would make it expensive to jump ship, then make sure your finances could take a rise of at least 2% to 3% in interest rates.
“It’s worth checking out which lenders offer ‘switch and fix’ type deals.
“Of course that may not happen. Inflation may subside, the UK may remain in economic gloom and rates may stay below 1% for many years to come.
“If that happens a tracker looks a good bet but it is a gamble!”
