Fixed-rate mortgage costs rise

Interest rates on fixed-rate mortgages are rising despite a falling inter-bank rate, according to Bank of England figures.

The cost of borrowing between banks fell in August, but lenders are not passing on the savings to mortgage customers on fixed-rate deals, figures showed today.

Data from the Bank of England showed the average interest rate charged on a five-year fixed-rate mortgage with a loan to value (LTV) of 75% reached an average 5.72% in August, having dipped to below 5% between January and May.

However, five-year swap rates (the bank-to-bank lending costs on which these deals are based) have seen a significant fall from a recent peak of 3.79% on 7 August to 3.34% at the end of the month.

Interest rates on two-year fixed-rate mortgages with a 25% deposit have remained at 4.42% in August, despite two-year swap rates falling from 2.37% to 1.95% during the month.
This was the fourth month in a row that the cost of five-year fixed-rate deals had risen, and by the end of August average rates on loans were at their highest level since the end of last October. At that point the average deal cost 5.88%, but the base rate was 4.5% compared with 0.5% today.

Banks were quick to pass on higher costs to borrowers in June and July this year when swap rates increased sharply, but falling rates have failed to produce more competitive rates.
Fixed-rate mortgages have grown in popularity as borrowers attempt to control their outgoings and shield themselves from possible interest rate rises. In June, 78% of people taking out a mortgage opted for a fixed-rate deal, the highest proportion in two years.

Critics have accused lenders of profiteering by keeping large margins between their own borrowing rates and those passed on to customers. But David Hollingworth of broker London & Country said that while there were profits to be made a lack of enthusiasm for increasing lending books was a bigger problem.

"I think one of the main reasons fixed rates have been staying put or even becoming more expensive is all tied up in the marketplace we are in," he said. "There is a lack of competition and a lack of lenders in the marketplace, which means there is an imbalance between supply and demand."

He added that many lenders had "at least as many customers as they want to attract" and that there was little enthusiasm for increasing competition as banks are "no longer chasing volume" when it comes to mortgage borrowers.

Hollingworth said only three lenders – Newcastle building society, Britannia building society and HSBC – were now offering five-year fixed-rate deals below 5%.

For both Britiannia and HSBC, borrowers need a deposit of at least 40% to get the rate, while Newcastle's deal is open to people with a 25% deposit.