Why mortgage rates could be set to fall


Mortgage rates could be set to tumble due to low swap rates and the continuing low base rate, say experts.

At the time of writing, two-year swaps were at 0.78 per cent, the lowest level since November 2013, while five-year swaps were 1.09 per cent, the lowest since May 2013.

This week Barclays announced a 2.19 per cent five-year fix for rate switchers and will cut rates by up to 18 basis points. NatWest Intermediary Solutions will be cutting rates on some of its higher LTV residential mortgages by up to 49 basis points.

Last week the Bank of England’s Monetary Policy Committee voted unanimously to keep the base rate at 0.5 per cent, marking nearly seven years of unchanged rates.

The committee voted 9-0 to keep base rates at their current low levels. At an earlier meeting in January just one member, Ian McCafferty, voted for a rise, saying he expected inflation to increase faster than the committee’s expectations.

Bank of England governor Mark Carney said earlier this month that he expected interest rates would remain at 0.5 per cent for the foreseeable future. Traders reportedly believe there is a 25 per cent chance base rate could even be cut from its current record-low level of 0.5 per cent.

Experts are also predicting the introduction of a number of sub-2 per cent five-year fixed rates. the cheapest five-year rate at the moment is currently First Direct’s 60 per cent LTV product, which is available at 2.09 per cent.

Coreco director Montlake says: “With governor Carney giving his latest assessment, the MPC saying that it looks there won’t be any rate rises for the foreseeable future and swap rates reacting accordingly, the cost of pricing has gone down.

“That will enable lenders to, if they want to, reduce some rates on their longer-term fixes. Given the fact that lenders are still in a competitive environment and very much want to get business in, it wouldn’t surprise me if we saw some rate reductions in the very near future.”

Chadney Bulgin mortgage partner Jonathan Clarke says: “Several lenders have had sub-2 per cent five-year fixes [in the past]. Barclays had a brief offering last year, and HSBC/First Direct are usually first in with those headline rates. HSBC tend to dominate that market. You could argue that HSBC mortgages aren’t widely available because they have quite strict criteria for qualifications.

“But if it was more widespread among lenders, that would be good. I can see that happening. 1.99 per cent is one of those psychological barriers. 2.1 per cent, 2.3 per cent is still a great deal, but 1.99 sounds amazing. It was only a couple of years ago that was an amazing two-year deal.”

Clarke adds that a cheaper five-year fixed rate product would give borrowers more certainty to borrow.

He says: “It’s really good news. Part of the reason we’re here with house prices the way they are is that when people have been able to borrow money, that money has been very cheap. If rates get down to 1.99 per cent fixed for five years you’ve really got to have a good reason not to do that kind of product. So they’re going to be popular.”

GPS Economics director Gary Styles says that a return to sub-2 per cent five-year fixes is technically possible, but with strings attached.

He says: “That’s premised on a weak economic performance. If you’re going to talk about the potential of rate cuts, which you can’t rule out entirely, then you could paint a picture where that scenario would happen.

“But on the flipside, what risk characteristics would that be saying about the mortgage market as well? If we were talking about a far more sluggish economic picture, what would that be saying about the labour market and wages?

“I think with the risk characteristics of the mortgage and housing market at the moment, if we are talking about that kind of economic backdrop, I think would probably mean that mortgage lenders were thinking again about some of their spreads and pricing in the market.”