In the simplest of terms, swap rates are the rates based on what the markets think interest rates will be in the future. So if the rate rises, then mortgage lenders will look to increase their rates so that they don’t lose out.
To help those remortgaging and prospective buyers better understand swap rates, Danny Belton, Head of Lending at Mortgage Advice Bureau answers some common questions.
What are swap rates?
Swap rates, also known as interest rate swaps, are the interest rates that lenders pay to financial institutions to secure funds for a set period. They’re a key factor in how lenders price fixed-rate mortgages.
How do lenders use swap rates?
Lenders use the cost of the swap rate to price the fixed mortgage products they offer. They also use them to manage risk and set competitive rates. The movement in swap rates also signals broader market expectations about future interest rate trends.
Are swap rates different from interest rates?
Yes, swap rates and the Bank of England base rates are not directly linked. While movements in the base rate can impact swap rates, the latter are essentially market forecasts of future base rates.
If interest rates drop, will my mortgage rate drop?
Even if the base rate falls, swap rates may not immediately follow suit, as the markets have already priced in this change. It's also important to note that only tracker rates are directly impacted by base rate changes.
Additionally, lenders often use rates as a tool to manage the flow of business. If a lender receives a significant number of cases, they may choose to increase rates to slow the flow of cases. Conversely, if they aim to increase volumes, they may lower rates. This behaviour is unrelated to swap or base rates.
Danny says: “Although rates have dropped significantly compared to last year, it’s only natural that homeowners might want to hold out for more possible cuts.
"However, with swap rates and interest rates not directly linked, this ‘wait and see’ approach could be costly in the long run.
“Even if rates fall in November, this doesn’t necessarily mean mortgage rates will drop, as these have already been factored in by lenders. For first time buyers or those whose mortgage is coming to an end in the next few months, their best bet is to speak to a mortgage broker. They can access the most suitable deals for your financial circumstances and ensure you’re mortgage-ready."
