The cost of funding for both short and longer-term fixed rate mortgages has fallen sharply over the past few weeks, prompting a number of lenders to reduce rates.
Analysis by mortgage brokers SPF Private Clients shows that two, three, five and 10-year swap rates all declined significantly in the last week of May.
This is part of a longer term trend. The cost of all of these swap rates is now below levels seen in February this year.
According to this analysis two-year swap rates are now at 0.89 per cent. Between 20 February and 1 May they were consistently above 1 per cent, rising to 1.12 per cent in mid-April.
There has been a similar decline in both five and 10-year swap rates.
However, the statistics provided by SPF Private Clients shows that swap rates are still above levels seen last year, indicating that there may be room for further reductions.
These swap rates show the rate at which banks expect to be able to borrow money over a given time period.
This latest falls have prompted a number of lenders, including Halifax, Yorkshire Building Society, Newcastle Building Society, Sainsbury’s Bank and Bank of Ireland UK to reduce the cost of their fixed-rate mortgages.
Although the predicted interest rate rise was put on hold, most economists are expecting the Bank of England to raise interest rates by 0.25 per cent later in the year. This could prompt swap rates to rise more significantly over the next few months.
In recent months there has been a significant increase in the number of borrowers looking to remortgage and lock into fixed-rate deals, ahead of any future rate rises.
SPF Private Clients chief executive Mark Harris says: “Swaps will continue to move up and down as the market attempts to predict the future path of interest rates.
“Clearly the trajectory is upwards, but by how much and at what pace is much harder to forecast.”
He adds: “Our view remains as before – the UK economy is in a fragile state and still prone to conflicting data on the strength or otherwise of any recovery. Added to that are the challenges being faced elsewhere in the world, particularly in the Eurozone.
“The UK mortgage market is highly competitive and over supplied in certain areas. This will apply downward pressure on mortgage rates and they could certainly go lower.”
Halifax has reduced rates over the past week. SPF Private Client says that conversations with other lenders indicate that servicing costs, rather than the cost of funds, have meant that they haven’t repriced downwards.
