News Swap rates
Homeowners Mortgage Support scheme
Not the only influence on mortgage pricing
Underwriting a proportion of the lender's ultimate risk of loss The government has launched a Homeowners Mortgage Support scheme (HMS). This scheme enables eligible borrowers to defer a proportion of their interest payments for up to two years, with the government underwriting a proportion of the lender's ultimate risk of loss. The implementation of the new government measure is designed to reinforce lenders' policies of forbearance for borrowers facing temporary and resolvable mortgage repayment problems, to minimise repossessions.
Repossession is a last resort. Lenders already show significant forbearance to borrowers facing temporary difficulties, to enable them to keep their homes where this is possible. Repossession is a last resort. Lenders already show significant forbearance to
borrowers facing temporary difficulties, to enable them to keep their homes where this is possible. This core principle is already underpinned by regulatory rules and industry guidance. HMS is a helpful additional tool and the scheme is aimed at borrowers who expect to be able to resolve their difficulties and resume full mortgage payments within a year or two. Some lenders have confirmed their participation in the home-owner mortgage support scheme (HMS). Other lenders have concluded that, while they support the principle of reasonable forbearance, they would prefer to help their borrowers outside the scheme and without calling on government financial support. It is important that if you are having difficulty paying your mortgage, you talk to your lender.
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The Council of Mortgage Lenders (CML) is concerned that some recent coverage of fixed-rate mortgage pricing fails to reflect the complex array of influences on lenders' pricing strategies at present. The CML is now seeking to shed more light on these factors, and explains that: Swap rates are commonly cited as "the cost to lenders of fixed rate funds", but the real picture is more complex. The recent decline in swap rates is not necessarily a clear indication that the cost of raising fixed term funding has fallen. A swap rate is the notional cost of exchanging a Libor-level floating income stream for a fixed stream. But simply looking at the swap rate does not account for the fact that not all lenders will be able to raise funds at interbank rates (Libor), especially in the current environment. It is relevant to take account of the cost of the underlying variable rate funding, as well as the swap rate. And some funding is raised directly at a fixed rate (two year commercial bank rate, for example), where recent spreads against a two year fixed mortgage rate have narrowed markedly, telling a very different story to swap rates. In sharp contrast to the early 1990s, lenders have very limited discretion to vary rates on their existing loans or "back book", with half of all mortgage lending on a fixed rate basis, a further significant tranche contractually tied to bank rate, and political pressure to reduce standard variable rates. While lenders need to treat all their customers fairly, both new and existing, there are very real pricing pressures that the lack of discretion on "back book" rates creates for the sustainable pricing of new business. Lenders are facing a range of higher costs, including the costs of showing increasing forbearance to more borrowers, the increased costs of holding more liquid assets and more capital as required by the FSA, the relatively higher funding costs incurred as a result of the competition for savings business, scarce and expensive wholesale funding, the high cost of funds that the authorities made available through the Credit Guarantee Scheme, and the reduced returns to lenders necessarily arising from a very low interest rate environment.
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