PRA warning puts brakes on rate cuts: Moneyfacts

Lenders appear to be taking heed of a warning by the Prudential Regulation Authority that it is watching their activities “like a hawk” as rate competition has slowed since the comments, according to Moneyfacts.

At the end of May PRA boss Sam Woods told lenders that regulators would be closely monitoring the levels of risk in the market and outlined concerns over an increase in high loan-to-value and high loan-to-income mortgages.

Moneyfacts data shows that despite the Bank of England base rate increasing by 0.25 per cent to 0.75 per cent last August, average two-year fixed rates dropped over the period that followed due to intense competition.

Two-year rates fell from 2.53 per cent last August to 2.47 per cent in May, but following Woods’ comments they have climbed back to 2.5 per cent.

The biggest reductions were on deals at 95 per cent loan-to-value with average rates dropping from 3.95 per cent last August to 3.26 per cent in May.

Average rates at this LTV dipped slightly further to 3.25 per cent in June where they have remained.

Moneyfacts finance expert Darren Cook says: “It is clear the warning by the PRA in May that the Bank of England is watching mortgage rates ‘like a hawk’ seems to have fulfilled the central bank’s possible intention to slow down mortgage rate cuts.

“Average mortgage rates had been steadily declining for some time, especially rates at higher LTV tiers, and prudent interference may have been a necessary intervention.”

Cook says that the rate drops up until May show lenders were willing to cut their risk margins in order to retain a competitive edge, but this trend may be over.

Lenders may now be focussing their attention on lower risk borrowers as the 65 per cent LTV tier was the only category to see average rates drop since May, he says.

Cook adds: “This is possibly the end of widespread mortgage interest rate cuts due to competition for the time being and we may only expect marginal changes until wholesale funding costs dictate differently.

“In fact, the only tier to see the average two-year fixed rate fall since May is the 65 per cent LTV tier, perhaps suggesting providers are now focusing their attention at the less risky end of the sector.

“Despite the cuts at the higher LTV tiers appearing to stall, potential first-time buyers are still, on average, getting a better deal than before the base rate rise.”



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