We All Need A Little Forward Guidance.
15th July 2013
We recently saw the dawn of a new age, with the first Bank of England Rate Setting Meeting involving new Governor Mark Carney in the hot seat. This led to some pretty interesting results, not because of anything that was actually done, but because of what was said.
Prior to the Canadian Mr Carney’s arrival there was much discussion about a policy he seemed to favour known as “Forward Guidance”, which put simply is an indication about the future, particularly about future interest rates.
True to form, whilst this was not a formal policy as such, the wording he used in the first statement made clear that the Committee do not see rates changing anytime soon and money markets were mistaken if they thought rates would move any sooner.
Before this announcement there had been some mild panic that Governments both here and on the other side of the Atlantic could soon start to withdraw some of the aid, abandon Quantitative Easing and lead to rates rising sooner than expected. Money market SWAP rates, those that affect fixed rates in normal conditions, spiked sharply.
But then Mr Carney spoke and this alone was enough to send Sterling falling and calm recent SWAP rate rises, at least in the short-term.
This all bought back into focus the discussion over whether now really is the best time to lock in to a cheap mortgage whilst rates are still remarkably low.
There has always been an argument over what type of product offers the best “value” at any one time, with those who have been sitting on a tracker rate product feeling pretty smug over the past few years as rates have plummeted to record lows.
Whilst value is only really known when looking back with hindsight, historically tracker rate products usually represented the cheaper option and were popular with many borrowers, not just those who were comfortable with the risk of a rise in rates.
Now that interest rates have hit a historical low and buoyed by the Funding for Lending Scheme, we now have an unusual situation where some of the cheapest products are now fixes rather than tracker products.
For those looking at a two year period, for example, a two year fix at 1.64%, (5.1% APR) with Chelsea seems more enticing than a tracker over the same period priced at 1.89% (3.7% APR) with Halifax.
After all, it used to be the case that borrowers would pay more for the added benefit of security, just like any insurance policy, but now in some cases you pay less.
For me the real value in the market currently is where 5 year fixes are concerned. It used to be the case that if you could find a 5 year fix starting with a 3 it should be grabbed with both hands, now you can obtain a 5 year fix at just 2.44% (4.0% APR) with Yorkshire.
Whilst the decision to fix involves a little more thought over this time period, you can for example obtain a lifetime tracker with no penalties from First Direct from 2.28% (2.3% APR), there are not many who believe rates will stay this low beyond the next three years and I believe for many the added benefit of security will be well worth it in years 3, 4 and 5.
As the Funding for Lending scheme continues to have a greater effect, this blurring of lines between fixes and trackers will continue although, certainly where the low LTV products are concerned, I believe we may be close to the nadir of fixed rate pricing.
For me it is a simple question of working out the possible downside in any product and the downside on taking a fixed product with rates remaining low is known, whilst the prospect of rates rising quicker than expected in the medium term is an unknown. The effects of Quantitative Easing and subsequent inflationary pressures as the UK economy improves will not be known for a while yet.
Whilst in the past many borrowers who should have taken the security of a fixed rate were tempted by lower tracker rates, the tables have now turned and fixed rates have been the new black in this seasons mortgage sales.
I believe the next few months could be the best time to take a fixed rate for a generation and those that do could well be the ones with the smug grin in the years to come.
So low rates look set to continue then and with a decent sporting calendar recently with the British & Irish Lions winning, Andy Murray grabbing glory and hopes of an Ashes whitewash the feel good factor looks set for a while; even the sun is shining!
As for forward guidance, well, we all need a bit of that from time to time.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.