Rates for 2-year fixes have cut since PRA’s warning

Michael Lloyd

July 2, 2019

Following the Prudential Regulation Authority (PRA) warning that the Bank of England is watching mortgage rates “like a hawk”, the average rate for 2-year fix has started to increase, data from Moneyfacts.co.uk has shown.

Since PRA chief executive Sam Woods made the warning at the end of May, the average rate for 2-year fixed products has increased from 2.47% in May to 2.50% in July, which Moneyfacts suggested shows lenders have taken note.

Darren Cook, finance expert at Moneyfacts.co.uk, said: “It is clear the warning by the PRA in May that the Bank of England is watching mortgage rates ‘like a hawk’ seems to have fulfilled the central bank’s possible intention to slow down mortgage rate cuts.

“Average mortgage rates had been steadily declining for some time, especially rates at higher LTV tiers, and prudent interference may have been a necessary intervention.”

The largest cuts to 2-year fixed rates took place at the maximum 95% loan-to-value (LTV) tier, where the average rate fell by 0.70% from 3.95% in August 2018 to 3.25% in June 2019, where it has remained for the last two months.

Cook added: “With the average 2-year fixed mortgage rate at maximum 60% LTV increasing from 1.89% to 1.90% since August 2018 and the average rate at maximum 95% LTV falling 0.70% from 3.95% to 3.25% over the same period, it seems clear that mortgage providers have been cutting risk margins to retain a competitive edge.

“However, it seems that this is possibly the end of widespread mortgage interest rate cuts due to competition for the time being, and we may only expect marginal changes until wholesale funding costs dictate differently.

“In fact, the only tier to see the average 2-year fixed rate fall since May is the 65% LTV tier, perhaps suggesting providers are now focusing their attention at the less risky end of the sector.

“Despite the cuts at the higher LTV tiers appearing to stall, potential first-time buyers are still, on average, getting a better deal than before the base rate rise.

“For example, if a potential buyer with a 5% deposit looking for a repayment mortgage of £200,000 over 25 years was offered the average rate of 3.95% for a 2-year fixed deal in August last year, it would see them repay £1,050.16 per month.

“However, if the borrower were to be offered the same terms at the current average rate of 3.25%, it would cost them £974.63 per month, £75.53 per month less, equating to a saving of £1,812.72 over the 24-month fixed term.”

Since the Bank of England base rate rose by 0.25% to 0.75% in August 2018, the overall average 2-year fixed mortgage rate fell by 0.06% from 2.53% in August 2018 to 2.47% in May 2019.

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