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Cost of mortgages up despite falls

12:53pm Thursday 9th July 2009

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Lenders are continuing to hike the cost of their fixed-rate mortgage deals despite recent falls in wholesale funding rates, research revealed.

The average cost of a two-year fixed-rate mortgage is now 5.18%, well up on the 4.67% charged on the loans at the beginning of June, according to financial information group Moneyfacts.co.uk.

Steep increases in swap rates, upon which fixed-rate deals are based, sparked a round of repricing among lenders during June, as they raised rates to reflect their own higher funding costs.

But despite two-year swap rates falling from their recent peak of 2.51% on June 11 to 2.04% now, lenders have not cut the rates they charge borrowers, leaving the margin on the average two-year fixed-rate deal at 3.15%.

The increase in the cost of fixed-rate mortgages comes at a time when there is strong demand for the loans from homeowners, who are keen to lock into low interest rates before the Bank of England base rate starts to rise again.

Figures from the Council of Mortgage Lenders released show that 74% of all mortgages taken out during May were fixed-rate ones.

The steep rise in the cost of fixed-rate products was reflected in data released by the Bank of England, showing that the average cost of a two-year fix had increased by 0.49% during June to stand at 4.47%.

The increase was even more dramatic on five-year fixed-rate products, with these rising by 0.63% to average 5.56%, the highest level since the end of October last year when the base rate was 4.5%.

But there was better news for borrowers wanting to take out a tracker mortgage, with rates changed on these deals dropping to a new record low of 3.81% during June, down from 3.99% in May.

Savers are continuing to suffer from low interest rates, with the average return paid on a branch-based instant access account remaining at a record low of 0.16% for the third consecutive month.

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