The Council of Mortgage Lenders (CML) is concerned that some recent coverage of fixed-rate mortgage pricing fails to reflect the complex array of influences on lenders’ pricing strategies at present.
The CML is now seeking to shed more light on these factors, and explains that:
Swap rates are commonly cited as “the cost to lenders of fixed rate funds”, but the real picture is more complex. The recent decline in swap rates is not necessarily a clear indication that the cost of raising fixed term funding has fallen.
A swap rate is the notional cost of exchanging a Libor-level floating income stream for a fixed stream. But simply looking at the swap rate does not account for the fact that not all lenders will be able to raise funds at interbank rates (Libor), especially in the current environment.
It is relevant to take account of the cost of the underlying variable rate funding, as well as the swap rate. And some funding is raised directly at a fixed rate (two year commercial bank rate, for example), where recent spreads against a two year fixed mortgage rate have narrowed markedly, telling a very different story to swap rates.
In sharp contrast to the early 1990s, lenders have very limited discretion to vary rates on their existing loans or “back book”, with half of all mortgage lending on a fixed rate basis, a further significant tranche contractually tied to bank rate, and political pressure to reduce standard variable rates. While lenders need to treat all their customers fairly, both new and existing, there are very real pricing pressures that the lack of discretion on “back book” rates creates for the sustainable pricing of new business.
Lenders are facing a range of higher costs, including the costs of showing increasing forbearance to more borrowers, the increased costs of holding more liquid assets and more capital as required by the FSA, the relatively higher funding costs incurred as a result of the competition for savings business, scarce and expensive wholesale funding, the high cost of funds that the authorities made available through the Credit Guarantee Scheme, and the reduced returns to lenders necessarily arising from a very low interest rate environment.