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Mortgage rates continue to rise but more choice at higher LTVs

"The Bank of England has indicated that the scale of gilt purchases will be at a similar pace to the previous £75billion addition to the QE programme and therefore it expects to fully invest this additional £50billion in the next three months. The Bank has previously indicated that this is the maximum speed at which it is realistic to utilize these funds, perhaps on the basis that it is broadly in line with the scale of new gilt issuance. The only significant change in the way the programme will be implemented is that The Bank will now divide its purchases into bands of 3 – 7 years, 7 – 15 years and over 15 years, whereas previously it only had 2 bands, 3 -10 years and  10 – 25 years. This suggests it could now purchase gilts with a maturity of more than 25 years, whereas previously that would have been outside its remit. Should it choose to purchase gilts with a maturity beyond 25 years it will bring The Bank more into line with the Fed’s policy.

"The Quarterly Inflation Report next Wednesday will add some meat to the bones of the economic outlook indicated in The Bank’s statement [today]. However, prior to the MPC’s next monthly meeting the impending and inevitable Greek default will almost certainly have occurred, with the main unknown being whether it will be an orderly or disorderly default. If it is orderly big questions will remain about whether Greece can deliver on the terms, especially with its imminent general election and the likelihood of the current coalition being defeated by parties opposed to the current level of austerity. If it is a disorderly default the markets are likely to turn their attention to Portugal and the whole sorry saga will continue with a different Sovereign as the main target.

"[Today’s] euro zone politicians have good reason to curse their earlier incumbents who designed this mess, with the arrogance of not including an escape mechanism for any country wanting to leave the euro. For those euro zone countries which will remain under severe pressure the politicians are in a Catch 22 situation. Whatever action they take they are likely to be committing political suicide at the ballot box, assuming the EU doesn’t impose more technocratic governments. As euro zone leaders seem unwilling to accept the economic illiteracy of the euro experiment it may eventually be the ballot box which forces the issue.

What does this mean for mortgages?

"Most mortgage rate changes over the last month have been increases, although a few lenders have gone against the trend. In particular funding pressures in the wholesale market as a result of the euro zone crisis have continued to push up the cost of tracker mortgages and, to a lesser extent, short-term fixed rates. The only bright spots for borrowers are 5-10 year fixed rates, which are fairly stable, higher loan to value mortgages and buy to let mortgages. As lenders look for better margins as a result of higher average funding costs the spread between rates charged on low and high LTV mortgages and has continued to fall. Over the last year the differential has on average narrowed by well over 0.5%. Buy to Let rates are typically 1 – 1.5% higher than comparable residential rates, after factoring in the impact of the generally higher fees on Buy to Let, but the increased competition in Buy to Let is also beginning to have an impact on rates in this market.

"On the plus side for funding costs the previously inexorable rise in three-month Libor has come to an end over the last month with the rate of 1.08% currently just off its recent peak of 1.09%. The fall is not significant but the fact that the upward trend has been stopped may be."

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