QE extended by £25bn but it is savers who bring relief to mortgage borrowers
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With today’s base rate decision a forgone conclusion, the only question we had to wait until midday to get the answer to was whether the Monetary Policy Committee would extend the quantitative easing programme and, if so, by how much.
The committee will have had sight of the draft Quarterly Inflation Report, to be published in six days time, and so today’s decision to extend the QE programme by £25bn suggests there is little, if anything, in the report in the way of optimism to counterbalance the depressing Q3 GDP figures showing that the UK has now been in a recession for the longest period since records began, and on the watch of the man who claimed he had abolished boom and bust.
However, the fact that the intention is to take three months to spend this extra £25bn, compared to the £50bn spent in the last three months, indicates that the MPC is at least less bearish on the outlook for the economy than it was three months ago.
Fortunately the picture for mortgage borrowers looks a little brighter, despite LIBOR rates having edged up over the last month, with three month LIBOR up from 0.55% to 0.60%, and swap rates having risen quite sharply. For example two year swaps are 0.30% higher at 2.07% and five year swaps are 0.35% up at 3.45%.
Despite these significant increases in swap rates both fixed and tracker mortgage rates have fallen over the last month. Prior to the credit crunch increases in wholesale rates on this scale would certainly have resulted in the cost of fixed rate mortgages rising.
The two reasons why they have not are that savings rates are now funding a much higher proportion of mortgage lending and competition in the mortgage market has increased considerably.
Taking the five year savings bond market as an example, according to Moneyfacts seven banks or building societies are offering a rate of 5% or over, with the top rate being 5.35% from Skipton Building Society.
Although competition in this market has increased to the extent that the number of banks or building societies offering over 5% has grown, the top rate available has remained in the very narrow range of 5.3-5.4% for several months. The relative stability of savings rates has helped to avoid mortgage rates increasing.
Couple this with the significant increase in competition over the last month from a resurgent Northern Rock, which has been cutting some rates twice a week. The impact of that competition has been to force other active lenders to cut their margins on new lending or miss their lending targets. Some have chosen to offer more rates at the higher LTVs rather than compete too aggressively for lower LTV business and so borrowers across the LTV spectrum have benefitted.
Northern Rock’s Q3 statement yesterday said that it’s gross lending in the first nine months of this year was £2.3bn. Now terms have been agreed with the EU it wants to get as close to £4bn as it can for 2009 lending and its 2010 target is £9bn.
The deal agreed with the EU is that it will not have any mortgage products in the Moneyfacts top 3 for the relevant category but this does not come into force until January next year and its old limit of 2.5% of total gross lending is effectively redundant. Thus it has a window until the end of the year to be as competitive as it needs to be to hit its targets.
This is having more impact on competition in the mortgage market than is likely from the forced sale of some Lloyds Banking Group and RBS branches, and at a time when the extra competition is badly needed.
Northern Rock’s 4.99% five-year (to 31/12/14) flexible fixed rate up to 70% LTV looks attractive for borrowers wanting the security of a fixed rate but despite the cost of two-year fixes also falling, short term fixes such as these offer few attractions compared to the significantly cheaper rates available on the best trackers, with lifetime trackers in particular looking attractive.
