View from City Road: Homebuyers need bond dealer's skill

Deciding between fixed- and variable-rate mortgages has given the poor old homebuyer the same agonising question to answer as those well-heeled bond market specialists who deal for a living in the City. Are long-term interest rates peaking? Those are the ones to which fixed-rate mortgages are linked.

And what about the argument over short-term rates between the Chancellor, who wants them down, and the Bank of England, which is beginning to think about raising them again? Variable mortgage rates could go up or down depending on who wins.

Many homebuyers wrongly held back when rates on five-year loans started rising earlier this year, because they were advised that it was just a blip in the bond markets. Some blip. Now five-year rates are so high - 2.5 per cent above their low point - that nobody is borrowing on them at all.

This week the longer interest rates, the ones to which fixed mortgages are tied, showed the first sign for months of easing back again. The five-year swap rate, a money market benchmark, eased 0.25 per cent to about 8 per cent.

Steve Bell, an economist at Morgan Grenfell, reckons there has been a vicious circle at work in the bond markets, but that it is now easing. Many building societies deliberately failed to hedge all their fixed-rate lending when rates were falling. When rates rose, they had to buy in the market to cover themselves, putting heavy upward pressure on the five-year swap rates. These rose more than was justified by the general increase in longer-term rates. One reason for this week's easing could be that so few five-year mortgages are being sold. It is just possible that the five-year mortgage rate, which has shot up from a low of 6.75 per cent to a highest current rate of about 9.25 per cent, could now be trimmed.

As it stands - 1.5 percentage points above the floating rate - it looks a bad buy unless you believe inflation will rise past 6 per cent again. There is so much disagreement in the markets that an ordinary homebuyer's guess is as good as the next person's.