Swap rates – instruments which lenders use to hedge potential interest rate increases which are closely linked to mortgage pricing – have crept up since May, but surged at the back end of last week after the US Federal Reserve hinted that it could wind down its programme of quantitative easing.
On May 3, five-year swap rates were 0.94 per cent. However, by Thursday 20 June, the day after Fed chairman Ben Bernanke said the US could end the programme by the middle of next year, they had reached 1.59 per cent, up from 1.34 per cent – 25 basis points more – on Monday 17 June.
Two-year swap rates have also climbed since early May, from 0.61 per cent on 3 May to 0.75 per cent on 17 June and 0.84 per cent on 20 June.
On Friday last week, 21 June, two and five-year swaps had increased again by 5 basis points and 8 basis points to 0.89 per cent and 1.67 per cent, respectively.
Both two and five-year swaps again shot up yesterday, with two-year swaps increasing to 1.01 per cent and five-year swaps to 1.85 per cent.
Brokers say the sharp increases in swap rates could bring a halt to the trend of falling mortgage rates – especially five-year fixed rates, due to the sharper increases – seen since the Bank of England introduced Funding for Lending in August last year.
John Charcol senior technical manager Ray Boulger says: “It seems to me, from a borrower’s perspective, the rational for waiting a bit longer to see if rates come down any further has completely disappeared and the potential for any further cuts in negligible, while the potential for rates to go up is substantial.”
London & Country associate director of communications David Hollingworth says: “Swap rates have been edging up gradually but when the Fed announced it was going to start cutting back on QE, they spiked.
“Whether it will be a trend of increasing rates across the board or just arresting the trend of cuts isn’t clear yet, but I think we will definitely see some more rates increasing, as we already have.”
Lenders have started to push up some rates already, especially in the five-year fixed rate area.
Today, Newcastle Building Society increased the rate on its 3.59 per cent five-year fixed to 80 per cent loan-to-value to 3.99 per cent, while Hanley Economic Building Society pulled a fee-free 4.2 per cent five-year fixed rate to 90 per cent LTV.