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Higher swap rates will increase the pressure to raise SVRs

Swap rates have jumped higher recently on fears of less central bank support. The announcement by the Federal Reserve Chairman that the US would reduce support for the mortgage bond market over this year and into 2014 was the catalyst for jitters in global financial markets.

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Strong support from central banks over the downturn has ensured low interest rates to the benefit of all types of borrower – corporate, household and Government.

There is a fast emerging debate about the need to reduce the scale of support and the impacts this might have on the profile of future economic recovery.

The near term impact of higher swap rates needs to be considered from both a borrower and lender perspective.

On the borrower side, the question is over the scale and timing of upward re-pricing of fixed rate mortgages and the impact on demand for mortgages.

Fixed mortgage rates have been on a steady decline and stood at an average of 3.46 per cent in April.

This decline in rates has been matched by an increase in the take-up of fixed rate mortgages.

Three years ago less than half of all mortgages were at fixed rates and this has grown consistently to stand at over 70 per cent today.

A change in pricing relative to floating rates could impact take-up of fixed rate deals but it is unlikely to be significantly unless there was a more substantial increase in the mortgage rate which seems unlikely at present.

Mortgage rates remain very attractive to borrowers and support for the market is set to remain in the near term.

From a lender perspective, market based pressures on funding costs for fixed rate mortgages will be muted while the Funding for Lending Scheme remains in place. Higher funding costs for fixed rates might drive greater use of FLS in the short term.

Looking further ahead, a sustained increase in swap rates over the next 18 months, until FLS ends, will leave lenders facing a large step up in funding costs. Just as standard variable rates have risen over the past 18 months in line with overall bank funding costs, so higher swap rates will increase the pressure to raise SVRs.

Although the jump in swap rates may turn out to be a short term blip, looking further ahead, it brings into focus the challenge of how the industry manages the transition away from Central Bank support to market based funding .

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