More indications of why fixed rates make increasing sense

On March 25 I wrote that it was time to fix and swap rates have subsequently bobbed up and down without moving very far.

Since then 4 and 5 year swap rates are up a net 0.10%, based on today’s closing rates, with longer term rates just marginally up. Nothing has happened over the last few weeks to change the basic message but a couple of recent events which reinforce the advice are worth noting.

Meanwhile Leeds B S announced this afternoon that the rates on their market leading 4.75% 10 year fix to 60% LTV and 4.75% 5 year fix to 75% LTV are being increased to 4.99% from tomorrow morning. This is further evidence of the recent upward trend in longer term fixed rates.

On Friday of last week Moody’s (one of the rating agencies which gave a lot of mortgage backed securities now regarded as toxic a triple AAA rating) decided to significantly downgrade their ratings on 9 building societies.

One society I spoke to today said they were only given one hour’s notice of this and I presume Moody’s extended a similar courtesy to the others!

The result of this will at best be to increase the cost of wholesale funding to these societies and at worst the withdrawal of some deposits.

The attitude of local authorities will be particularly important in this respect as they are major investors in building societies, especially at this time of year when councils are flush with cash from council taxpayers who pay half yearly.

There may also be an impact on those societies who have participated in the Bank of England’s Special Liquidity Scheme.

But presumably the Bank of England did their own due diligence on assets they accepted in exchange for Treasury Bills.

The risk of holding these building society assets hasn’t actually changed for the worse. What has changed is the opinion of the risk of one rating agency with a flawed track record.

In fact on the basis the downgrade is primarily based on the extent to which house prices are expected to fall and the outlook on house prices now looks less bad than it did 6 months ago the timing of the downgrade smacks of panic after the Dunfermline failure.

Hopefully, the Bank of England will continue to back its own judgement rather than Moody’s and will also take account of wider economic considerations.

Nevertheless this downgrade will inevitably have a negative impact on these societies’ ability to lend and the rates they charge for whatever new lending they do.

The second event I referred to above is the yield on 3 month US Treasury Bills.

After turning negative in December for the first time ever since the government began selling them in 1929 the rate on these bills picked up to 0.33% in early February but has since fallen back to 0.13%.

Bloomberg News said today that the reason Treasury Bill rates touched 0% back in December was that investors were panicking but the reason yields are now falling is that the Federal Reserve’s efforts to revive credit markets are starting to work.

Demand for bills is rising because investors, including foreign central banks, are snapping up the shortest term US securities as the Federal Reserve buys Treasuries to drive down longer term borrowing costs in its quantitative easing programme.

For example China bought $5.6bn in bills and sold $964m in US notes and bonds in February, the first time since November it purchased more bills than longer maturity debt.

This is perhaps an indication that China, the largest US creditor with $744bn of debt, is getting increasingly worried about the medium term inflationary impact of the quantitative easing programme.

These are just two examples of why fixed rates for longer term mortgages are unlikely to fall significantly from current levels and why most borrowers should be looking to fix for, say, 5 to 10 years, at some stage over the next few months.

The actual timing for such a move should depend on individual circumstances, not least when any current early repayment charge period ends.

Borrowers paying a very low rate, say up to 2.5%, and with plenty of equity in their property, have the luxury of not necessarily needing to rush to switch, as even if they end up paying a little more for their fixed rate later in the year this may be more than offset by paying a very low rate on their current mortgage for several more months.

But an increasing problem as long as property values continue falling is that more and more people will find their LTV has risen above 75% and it then becomes very difficult to get a decent fixed rate.

Most SVRs are between 4% and 6% and so borrowers reverting to an SVR in this range will be able to switch to a fixed rate with only a small increase in their rate or even a decrease, again obviously subject to their LTV.

Halifax and Bank of Scotland borrowers are well placed when they come to the end of their deal as both lenders are currently offering good product transfer fixed rates for existing customers, even if they have little or no equity.

For example Halifax offers a good product transfer rate fixed to 30/4/14 at 4.54% with a £999 fee up to 60% LTV, but the rate only rises to 5.29% with a £1,249 fee for borrowers with less than 5% equity or even no equity at all, which is excellent value.