A sharp rise in government bond markets means that banks and lenders may find themselves having to cut their fixed-rate mortgages, FT.com has reported.
Mortgage brokers warn that lower borrowing costs will be hard to pass up by the banks and lenders because they would want to increase profit margins. Fixed-rate mortgages are set by swap rates and the latter has fallen, along with government bond yields. Swap rates measure the cost for a bank or building society to swap or switch from a floating rate to a fixed rate.
Ray Boulger of broker John Charcol commented that people shouldn?t expect to see banks and lenders rates go down straight away. He said: ?I don?t think we are going to see a flood of lenders cutting rates just because swap rates are coming down.?
Another factor in banks not wanting to pass up cheaper borrowing costs is due to demand for mortgages is outweighing supply and for lenders, cutting rates would be too much of a good thing.
Government bond yields on two-year gilts fell to 0.785 per cent last week ? the lowest level since records began in the 1980s. Meanwhile, five-year gilt yields fell to 2.43 per cent.
Expectations of official interest rates remaining at 0.5 per cent, a historic low, and that the Bank of England would allow negative interest rates on commercial bank deposits led to the falls in government bonds. This has led to banks to switch these deposits into government bonds for fear of being charged for saving their money at the central bank.
Swap rates fixed over two years fell to 1.95 per cent on Friday ? a drop of nearly half a percentage point since the start of August. Swap rates over five years fell to 3.33 per cent ? also almost a fall of half a percentage point.
