Finance directors have been urged not to rush to fix bank loans at long-term interest rates as waiting could save them money.
There is a trend among registered social landlords to fix the interest charged on their loans.

Because of the market perception of future interest rate hikes by the Bank of England, the best fixed-rate offers are 5-6% – significantly higher than the variable rate, currently at a long-term low of 3.5%.

But Richard Murphy, director of structured finance and risk management at consultant Prebon Marshall Yemane, called for caution and warned RSLs not to ignore the lower prevailing variable rates set by the Bank of England's monetary policy committee.

He said: "The markets have raced ahead of themselves and are pricing in rate rises much sooner than we think the MPC will act.

"I would say to housing associations that they shouldn't get caught up in the rush to fix interest rates. They need to think rationally whether or not it is the best move for them. They shouldn't just follow the herd.

"If we were to wind the clock back 10-12 years, the expectation then about interest rates was that they would increase. This resulted in many people fixing at 9-10%. Interest rates then subsequently fell. I would say to people that we should learn the lessons of the past."

However, Murphy's view is not shared by all in the City.

Markets are pricing in rate rises much sooner than we think the monetary policy committee will act

Richard Murphy, Prebon Marshall Yemane

David Mairs, operations director of Hacas Exchequer Services, said: "Three months ago, our economists were forecasting a 0.25% cut by the end of the year.

"This is no longer the case. They now predict a modest upturn in both the short and long-term rates. Over the next few months, staying with variable rates will save you money, but doing so beyond that with rates likely to rise could present a rather serious risk.

"There are inflationary concerns facing the Bank of England and, as a result, a further cut in interest rates is looking highly unlikely."

Associations that have recently moved to reduce their exposure to variable rates include Housing Solutions Group – it has fixed £70m of its £72m debt – and Knowsley Housing Trust.

Figures from the Housing Corporation show that 56% of RSLs' debt is tied to variable interest rates. RSLs owe £19.6bn in outstanding drawn funds.

The Council of Mortgage Lenders has predicted that base interest rates will bottom out this winter at 3.3%, then rise to 4% by the end of 2004.

Source

Housing Today