Discover how swap rates influence mortgage interest rates and gain a clear understanding of what swap rates actually are.
When it comes to mortgage interest rates going up or down, you may have heard the media and mortgage industry experts talking about swap rates. What are they exactly, and how do they affect mortgage interest rates?
Swap rates – also known as interest rate swaps – involve a mutual exchange of interest rate payments between two parties. One party agrees to accept a fixed-rate payment, while the other party receives a variable payment.
In the context of mortgages, swap rates refer to the amount that lenders pay to financial institutions in order to obtain stable funding for a specific duration. These rates can vary depending on the terms, such as one, two, three, five, or ten years, and they play a crucial role in determining the pricing of mortgage products for lenders.
What happens when swap rates change?
When swap rates decrease, mortgage rates also tend to decrease. Conversely, if swap rates increase, mortgage rates will likely follow suit.
Recently, swap rates have been volatile as they can be influenced by a wide range of factors – such as war, inflation, credit risk and the decline in the value of sterling. All of these factors have played a part in swap rates being more volatile. If inflation is high, the Bank of England’s base rate may increase, and swap rates may also go up.
Conflicting rate trends
In late January, swap rates went up slightly. However, this has only been a slight uptick, and at the time of writing, average mortgage interest rates have come down. A spokesperson for property website Rightmove recently said that there have recently been some conflicting rate trends reported, and lenders are “treading a fine line” between offering some competitive rates and seeing slight increases in swap rates.
We will keep you updated on swap rates and interest rate changes.