UK lenders will be pressured to cut mortgage rates as markets stabilize

Mortgage brokers say lenders will come under pressure to offer cheaper fixed-rate mortgages as the market rates they use to price deals stabilize at current levels.

Following last week’s turmoil in UK government bond prices, banks were forced to temporarily withdraw firm trades for new customers as swap rates, which mitigate interest rate risk as banks exchange borrowers’ fixed rate money for a floating rate, have risen sharply.

Banks then began reintroducing new products at an average rate almost a percentage point higher, reflecting increased costs for lenders.

But markets have rebounded in recent days after the Bank of England’s £65 billion intervention in the gilts market last Wednesday and a partial reversal by Chancellor Kwasi Kwarteng on his unfunded ‘mini’ tax cut budget, that triggered the crisis is reassuring.

Both the two- and five-year swap rates have fallen from last week’s peaks of 5.9 and 5.4 percent, respectively, and are now trading just 50 basis points higher than pre-Kwarteng’s tax return of 4.9 and 4.6 percent .

But average fixed-rate mortgage rates continued to rise this week. According to data from Moneyfacts, the average for two-year fixed-rate mortgages is now 5.97 percent, up from 5.75 percent on Monday and 4.74 percent on the day of Kwarteng’s announcement.

Andrew Montlake, chief executive of mortgage broker Coreco, said: “If swap rates remain low, there will be a lot of pressure on lenders to cut some of their new interest rates, which over time you may do.”

Swap rates aside, lenders have to walk a fine line between being open to fixed income and offering interest rates so attractive that they are swamped by borrowers eager to lock them in before further expected rate hikes are anticipated.

“They’re essentially pricing themselves into doing a lot of the work while they’re evaluating,” said Simon Gammon, founder and managing partner of Knight Frank Finance. “I’m quite confident that with a few more weeks of stable swap rates, we could start bringing more reasonable rates back to the market.”

David Hollingworth, a director at L&C Mortgages, said it’s “really positive” that some lenders have already come back with fixed-rate mortgages, which should lead to “more competition and slightly stiffer interest rates”.

The number of mortgage products rose to 2358 from 2262 on Monday, according to Moneyfacts, although it’s still a far cry from the 3961 on Sept. 23.

The Financial Conduct Authority contacted banks late last week over concerns about the sharp rise in interest payments.

In a speech last month, Sheldon Mills, FCA’s executive director for consumer and competition, said that with 3.2 million fixed-rate mortgages maturing in the next two years, “it’s more important than ever for borrowers and savers to be fair.” and competitive offers are made on prices.”

He said the FCA had told lenders they should do more to help borrowers switch to less expensive options and was “closely monitoring” developments.

However, there is also a risk of further market dislocation in the coming weeks as the BoE’s emergency purchase program expires on October 14th.

Investors will also be watching for an expected early announcement of the government’s debt haircut plan by Kwarteng – set out alongside the official guidance. Allies of the Chancellor have said he intends to bring it forward from the original date of November 23.

“There will be ups and downs to come in the coming days and weeks,” Hollingworth said.

https://www.ft.com/content/e6255d4b-e68c-4f0d-96d9-28daaf69af56 UK lenders will be pressured to cut mortgage rates as markets stabilize

Adam Bradshaw

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