Fixed rate mortgages set to become cheaper

House in hand

Fixed rate mortgages are set to become cheaper after the interest rate banks charge each other fell to below the 5% mark.

Mortgage lenders have recently come under fire for continuing to charge high rates for their fixed products, despite the Bank of England cutting interest rates in December.

In fact, recent research from found that the cost of fixed rate products had actually increased since the cut. Louise Cuming, head of mortgages at, says: "Many homeowners who waited until after the interest rate cut to get a fixed-rate deal will be worse off - much to their annoyance."

Why aren’t fixed mortgages cheaper?

Experts say that the cost of fixed rate mortgages is not dependent on the Bank of England’s interest rate alone. One important factor is swap rates – the rate of interest banks charge each other for borrowing money. Since the Bank of England cut rates, swap rates have remained high mainly as a result of the credit crunch and increased nervousness among financial institutions.

However, mortgage brokerage John Charcol says that because two-year swap rates have now fallen below the 5% mark, lenders are already launching cheaper rates.

Katie Tucker, of John Charcol, says: “Multiple lenders including Woolwich, Lloyds TSB, Intelligent Finance and Cheltenham & Gloucester, have reduced their fixed rates by around 0.15%, yet increased tracker rates by the same amount.”

Despite these cuts, Tucker says tracker mortgages still offer best value for borrowers at the moment as interest rates are likely to be cut to 5% or lower during 2008.

Woolwich, which has cut its fixed rates by as much as 0.3%, says the move was prompted by falling swap rates.

But Andy Gray, head of mortgages for the Woolwich, says that despite some lenders cutting rates not all will follow suit because of “economic uncertainty”. He adds: “Although the overall trend in interest rates is down there is a little more uncertainty as to how quickly they will fall.”

What other factors impact the cost of mortgages?

Swap rates are just one factor that lenders consider when pricing their fixed rate loans.

Sue Anderson, from the Council of Mortgage Lenders, says the risk appetite of lenders also determines the prices they charge for fixed rate products.

Just as lenders may have periods where they aggressively go after business by offering cheap rates, they equally have periods where they effectively price themselves out of the market. This might be because of a shortage of funding, or simply because they want to focus on another product area.

Anderson adds: “There is no single reason why all fixed rates haven’t come down in price. But none of the factors that determine the prices lenders charge for fixed rates is directly linked to the Bank of England’s interest rate.”