Rise of fixed-rate mortgage costs

Lenders passing on a rise in wholesale funding costs to borrowers could increase the cost of fixed-rate mortgages, it has been warned.

The dramatic rise in swap rates - which fixed-rate deals are based on - is expected to provoke repricing amongst lenders.

Two-thirds of borrowers are opting for fixed-rate loans to take advantage of the current low cost of borrowing. This means the move will hit those looking to remortgage or buy a home.

Ray Boulger, senior technical manager at mortgage broker John Charcol said: "On Monday we saw another sharp rise in swap rates, following closely on from other recent increases.

"The scale of the increase was large enough to be the straw that breaks the camel's back and as a result I expect several lenders to increase the cost of at least some of their fixed-rate mortgages over the next few days."

Two-year swap rates, upon which two-year fixed-rate mortgages are based, have soared from 1.98% on May 14 to 2.48% on Monday, although they have since eased back slightly.

The rise is even bigger for three and five-year swap rates, with these increasing by 0.62% during the same period, to stand at 3.11% and 3.76% respectively.

Ten-year swap rates have also increased, rising by 0.44% to 4.24% since mid-May.

The rise in funding costs comes at a time when lenders have increased the margins they charge on fixed-rate mortgages due to the increased risk of borrowers defaulting on their debt.

The average cost of a two-year fixed rate loan is currently 4.68% - 2.26% more than the two-year swap rate.

The current differential is a far cry from the situation in July 2007, when the credit crunch first struck, when lenders were actually making a loss on two-year fixed-rate deals, charging borrowers an average of 0.05% less for the mortgages than two-year swap rates.

Mr Boulger warned that increases in mortgage rates could stifle some of the recent signs of recovery in the housing market.

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