Cost of Five-Year Fixed Rate Mortgages Falls on Global Outlook
Five-year fixed rate mortgage costs fall as borrowing becomes cheaper around the world
2 mins to read
The average price of a five-year fixed-rate mortgage has dropped in recent weeks as the cost of borrowing has come down in response to UK political uncertainty and global trade tensions.
Five-year interest rate swaps have traded between 0.6% and 0.65% in August, which was marginally below the cost of a two-year swap, the first time such an inversion has taken place in ten years. A five-year swap was priced at 1.4% 12 months ago.
“We have often thought that rates can’t go any lower, but here we are again,” said David Hall of Knight Frank Finance. “Tighter regulations mean the main criteria lenders can compete on is price so it becomes a very competitive market, which is something borrowers need to be acutely aware of. We currently have a ten-year fixed rate of 2.4% on the market, which is the lowest we have ever seen.”
The average cost of a five-year fixed rate mortgage based on a loan-to-value ratio of 75% was 1.96% in July, according to the Bank of England, down from 2.04% in July last year. However, a number of deals below 1.75% were available in August.
On a mortgage of £500,000, a difference of just 0.1% represents a saving of £500 per year.
Interest rate swaps are financial instruments that enable investors to exchange fixed-rate payments for floating rate payments to hedge against the risk of interest rate movements and are used by lenders to price their fixed-rate mortgages.
In similar fashion to the UK interest rate swap market, August also saw a yield curve inversion on U.S. government bonds, as the cost of borrowing briefly became cheaper over ten years than two years for the American government. This inversion has previously been a leading indicator for recessions.
Yields on ten-year UK government bonds dropped to record lows of below 0.5% in August in response to economic and political uncertainty.