Yawn, base rate on hold

No one will be surprised to see that the Bank of England Monetary Policy Committee has decided to keep the base rate on hold at 0.5% for the seventh month in a row. The chances of any other decision were pretty minimal to say the least.

Borrowers on standard variable rate are sitting tight enjoying their low payments at present there is not much incentive to consider remortgaging for those lucky enough to have a decent level of equity in their properties. For those taking out new mortgages, the fixed vs. floating decision is not getting any easier.

Whilst it is good to see that lenders have passed on cuts in swap rates to short term fixed rates there seems to be little change for borrowers taking out long term fixed rates. 2 year swap rates have dropped by 0.21% since the last MPC meeting and whereas 5 year swap rates have dropped 0.3%. However since the August meeting, 2-year swaps are down by 0.50% and 5-year swaps are down by a massive 0.6%. Those borrowers seeking long term security are being forced to pay a sizeable premium over those who are happy to take floating rates, many of whom are now getting deals below 3%.

The lenders trade bodies have been busy educating us, to tell us that lenders funding costs aren’t linked to 3-month LIBOR which has levelled out at just above the base rate but market conditions have improved considerably in the past 2 months and the cost of fixed rates compared with floating rates is directly linked to the price of swap rates which have plummeted. Lenders need to price longer term fixed rates realistically to avoid pricing risk averse borrowers out of the market.

Aug MPC meeting Sept MPC Meeting 7th October 2009
2 year swap rates 2.26% 2 year swap rates 1.96% 2 year swap rates 1.75%
5 year swap rates 3.67% 5 year swap rates 3.37% 5 year swap rates 3.07%