Tackling the issue in this week’s Market Watch are:
Michelle Slade, spokesperson for Moneyfacts
Jonathan Cornell, communications director at First Action Finance
Rob McCoy, senior product and communications manager at PMS
Michelle Slade, spokesperson for Moneyfacts
At the start of the year, fixed mortgage rates began to rise as market analysts predicted an imminent base rate increase.
As the likelihood of a rise waned, lenders reacted by reducing the cost of fixed rate mortgages.
So much so, that the average two- and three-year fixed mortgage rates stand at an all-time low of 4.36% and 4.95% respectively, while at 5.37% the average five-year fixed stands just 0.04% off its all-time low previously achieved at the end of 2010.
The lowest rates on the market continue to be targeting borrowers with at least a 40% deposit, with many of the lowest-rated deals being offset by a high percentage arrangement fee.
Encouragingly, lenders are starting to relax their criteria slightly with some now offering their best deals to borrowers with a 25% deposit. Increased competition in the 90% LTV sector has meant rates on these deals have finally started to fall after being fairly static for the last few years.
Lenders are now acclimatised to the mortgage market with base rate at 0.50% and, the longer we remain at this level, the more likely it is that rates will fall further.
A number of lenders appear keen to be at the top of mortgage best buys and, as they battle it out to come on top, borrowers benefit from increasingly competitive deals.
While rates may go a little bit lower, I think it is more likely that lenders will continue to open their most competitive deals to a wider audience by increasing maximum LTVs.
Lenders are always much slower at bringing rates down than they are at raising them and, the minute the market predicts an imminent rise, you can be sure that rates will start increasing.
Jonathan Cornell, communications director at First Action Finance
I think we are likely to see five-year fixed rates drop slightly. There has not really been much competition at the lowest LTV levels.
We saw Chelsea Building Society launch the first sub 4% five-year fixed rate a few weeks ago, but only Yorkshire Building Society has followed.
Five-year swap rates have dropped massively to below 2.4% where they are now about 1% more than two-year swaps.
There has been massive competition recently in the two-year fixed market, with Abbey for Intermediaries launching some excellent key account exclusives, which were available for just a week.
However, this competition has not hit the five-year fixed market. This is a real shame as I don’t think there is much risk of rates going significantly higher in the next couple of years, whereas after three years there is a lot of uncertainty as to how high rates can get.
It is difficult to predict how low rates will go, as ultimately this depends on the economy.
If we continue to see negative economic data, then rates will go down; if we start to see some improvements, then rates will edge up.
Some have suggested that we will see five-year fixed rates go down as far as 3.75%, but I am sceptical. I think we will continue to see lenders concentrating on the two-year market rather than longer.
Hopefully, we will see more product development. We have seen a couple of excellent products recently, including a five-year fixed at 90% with no ERCs from Coventry and a deal from Accord that is a tracker for two years before reverting to a three-year fixed rate, which a few firms have access to.
Rob McCoy, senior product and communications manager at PMS
Any lender who launches a five-year fixed rate that begins with a four is likely to be popular at the moment.
Lenders need their products to remain competitive, but as the market begins to price rate rises into their swap rates it looks unlikely that fixed rates will go much lower.
Recent movements in the swap rates are showing a flattening trend, with some gradual increases.
Some lenders have been including a “floor rate” in their products, so no matter how low swap rates may go, lenders effectively cap the rate paid by customers, even if they could go lower due to cuts in base rate or lower swap rates.
Some of the recent deals offered by lenders are aimed at encouraging borrowers, who are coming to the end of a current product rate or have already moved to a low SVR or base rate-linked product, to switch now before rates start to rise.
This summer we will see a large number of five-year fixed rate deals coming to an end. Lenders will be trying to retain these customers, whilst at the same time trying to attract new ones.
However, some of these clients will be at the higher loan-to-value spectrum and the low rates we have seen recently are not going to help these clients as much as those whose LTV is 75% or below.
Many lenders remain risk adverse and need to relax their criteria in order to help these clients.
