Has the time come to fix your mortgage rate? With financial markets worrying that the end of money printing (Quantitative Easing) is in sight, interest rates in the money markets have started to edge up and that could feed in to mortgage rates.
The catalyst for this was a speech by Ben Bernanke of the US Federal Reserve on 19th June suggesting that the Fed might scale back its purchases of US government bonds. The result was a sharp fall in the price of bonds on both sides of the Atlantic. Because each bond pays a fixed amount in interest, a fall in the purchase price is effectively the same thing as getting a higher interest rate – described as an ‘increase in yield’.
As you can see from the table on the right, the yield on UK government bonds has risen sharply in the last month or so.
What has this got to do with your mortgage? Lenders use financial markets to manage their risk when offering fixed rate mortgage deals. To do this, they use interest rate swaps to manage their exposure to changing interest rates. Interest rate swaps tend to follow bond yields pretty closely (although by no means in lock-step), so higher bond yields increase the cost to banks of providing fixed interest rate mortgages.
We have already seen one or two UK lenders pull particularly attractive fixed deals and it’s probably true that in the short-term, we are likely to see fixes become dearer or remain static rather than fall.
Nevertheless, it is equally unlikely that we will see a sharp and sudden increase in rates. Why? Firstly, the Funding for Lending scheme means that the banks have ready access to a cheap source of funds and are not as dependent on the financial markets as they once were
Secondly, the swaps market itself is highly competitive and the large wholesale banks are always keen to come up with the best deals for lenders to help them manage their risk.
Thirdly, the whole point of tapering QE is to prevent markets reaching unsustainable heights that would require corrective action in the form of sharply higher interest rates. Mr Bernanke’s medicine may taste a little sour now, but it should avoid the need to take a much nastier potion in a few months’ time!
Finally, it’s also clear that central bankers realise that the economic recovery is still fragile, and that a gentle hand on the tiller is needed. In his last appearance before the Treasury Select Committee, Mervyn King said that the unwinding of stimulus measures and raising of interest rates would only come after a significant economic improvement.
So – it looks as if some hardening in mortgage costs today may be the price we have to pay for a more stable interest rate outlook over the next few years.