If you weren’t tuned into what interest rates are and how they affect your mortgage before 2023, then the chances are that you’re fully tuned into them now. Interest rates and inflation rates were all the rage in 2023, and now mortgage rates are coming down, too.
However, not that many people know about swap rates – or how they impact mortgage rates. But they’re quite important.
So, with that in mind, here’s a Maidenhead mortgage broker’s take on swap rates and why you need to be aware of them.
Swap rates explained
Even lenders have to borrow in order to lend. So, imagine if a lender were to award 10 fixed rate mortgages at rate A. Then, the Bank of England (BoE) unexpectedly decided to increase the base rate by a staggering 10 per cent, which meant that the lender’s cost of borrowing (which isn’t fixed) for those mortgages went up by way more than the profit they were generating.
Simply put, this doesn’t happen. And the reason it doesn’t happen is that lenders use swap rates to shield themselves from interest rate rises by paying financial institutions a high enough rate to mitigate this risk of offering fixed rate mortgages.
A swap rate allows lenders to effectively build in a buffer so that they’re protected and can carry on making money despite fluctuations in the cost of borrowing.
Swap rates are heavily based around market sentiment and what interest rates are predicted to be in the future. The important thing here is that if these rise, lenders tend to increase mortgage rates in order to ensure that that buffer is still hardwired in.
Why are swap rates important to consider?
Swap rates are important to keep in mind when looking for a mortgage as there’s often the assumption that if the BoE’s base rate of interest falls and inflation falls, mortgage rates will fall, too. And that’s broadly true.
However, swap rates are linked to a different system – the Sterling Overnight Index Average (SONIA), to be exact, which replaced the London Interbank Offered Rate (LIBOR) in 2021. So, even if the base rate is falling and everything points to economic recovery, yet swap rates increase, there is a chance that mortgage rates will go up.
Whilst we still think mortgage rates are going to continue to fall for a while, it’s worth pointing out that swap rates are starting to rise.
On that basis, if you’re currently sitting on the fence when it comes to getting a mortgage, holding on for rates to fall further, or are just putting off getting a mortgage because you’re too busy, our advice would be to speak with a mortgage broker sooner rather than later.
Tired of searching for the best mortgage deal on your own? If so, get in touch with our team of Maidenhead mortgage advisers on 01628 560820 or by emailing enquiries@altonmortgages.co.uk.