A sudden increase in swap rates over the past week has increased market fears that the steady decrease in mortgage interest rates over the past 12 months could be coming to an end. Swap rates are utilised by lenders to gauge the potential rise and fall of interest rates, which in turn are then linked to mortgage pricing. These rates have been steadily rising since early May, but suddenly spiked last week as the US Federal Reserve floated news that it may begin to ramp down its own quantitative easing strategy.

Figures produced on swap’s for May 3rd registered rates at 0.94 per cent, but a day after the Federal Reserve broke the news that they are considering ending the easing strategy in mid-2014, the figure rapidly rose to 1.59 per cent. This sharp increase jumped swaps from 1.34 per cent, an unprecedented 25 point movement in the current market.

But what does this mean for contractors looking for lending? Many inside the industry see this growing trend as the early warning signs that interest rate drops could be coming to an end. On that basis, the suggestion is that the market is likely to start seeing steady increases to rates that have seemingly re-invigorated the ailing mortgage sector over the past year. The most likely products to be hit by these rises will be five year fixed rates, as the majority of lenders have increasingly reduced longer term options in a bid to secure more business, and are likely to look to recoup funds in this area.

Over the past week, Halifax, one of the UK’s largest lenders, has removed several of its better value fixed rates and have also removed the complete range of 80 per cent loan to value options. Simon Butler, of Contractor Mortgages Made Easy, sees this as a sign that waiting for lenders to offer even more competitive options is now not the most sensible strategy: “What the sudden rise in swaps suggests is that the time for lenders to keep making reductions to retain a market share is fading. As the natural counterpoint to further reductions will be to implement incremental increases in the short term, securing a low priced deal now is beginning to look like the wisest strategy.”

During the Treasury select committee hearing on Tuesday, Mervyn King gave his final remarks on the state of the market. King remained firm on his belief that the UK should continue to maintain a fluid monetary policy, and he strongly backed the Bank of England’s own use of quantitative easing. King’s opinion of the impact that the Federal Reserve’s proposed policy shift will have on UK markets was clear: “The view that we are definitely at the beginning of the end and we definitely need to raise interest rates is a premature judgement about where we are.

“No central bank has rapidly moved down that course. The Federal Reserve has merely said that the easing with which it was still engaging may taper at some point depending on economic conditions.”King, soon to end his appointment as governor of the Bank of England of July 1st, was unequivocal on where he sees the future of the market: “The idea we are about to return to normal levels of interest rates is premature. One of the reasons it would be premature to do it more quickly is precisely because households have high levels of debt.” This point appears to resonate in incumbent governor Mark Carney’s mind, as the suggestion is that rises in the Bank Base Rate are unlikely to appear for at least two years under his stewardship.

Article by: Jon Shields, Media Executive at Contractor Mortgages Made Easy

Media Contact: Raman Kaur, Public Relations Manager

Tel: 01489 555 080

Email: media@contractormortgagesuk.com