Fixed-rate mortgage costs rise

The bank of England figures show that Interest rates on fixed-rate mortgages are rising despite the falling inter-bank rate. Accordingly, the cost of borrowing between banks have fallen in August, but lenders are not passing on the savings to mortgage customers on fixed-rate deals.

According to data from the Bank of England, the average interest rate (charged on a five-year fixed-rate mortgage with a loan to value (LTV) of 75% ) was down below 5% between the months January and May, but reached an average 5.72% in August.

However, five-year swap rates (the bank-to-bank lending costs on which these deals are based) have decreased from its peak of 3.79% on 7 August to 3.34% at the end of the month. Interest rates remained at 4.42% in August on two-year fixed-rate mortgages with a 25% deposit, but two-year swap rates have seen a decrease from 2.37% to 1.95% during the month.

By end August the cost of five-year fixed-rate deals had risen and the average rates on loans were at their highest since the end of last October, when average deal cost was 5.88%, but the base rate was 4.5% compared with 0.5% today.

Banks hurriedly passed on higher costs to borrowers in June and July when swap rates increased sharply, but falling rates have failed to produce more competitive rates.

Fixed-rate mortgages have become popular with borrowers attempting to control their outgoings and to shield themselves from high interest rates. In June, 78% of people taking out a mortgage opted for a fixed-rate deal, the highest proportion in two years.

It is revealed that lenders are profiteering by keeping large margins between their own borrowing rates and those passed on to customers. According to David Hollingworth of Broker London & Country, 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.