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If you are planning to apply for a mortgage or a remortgage, you may have heard the term ‘swap rates’ bandied about when researching the market.
Swap rates can have an impact on the quality of mortgage deals available from UK lenders, but what exactly are they and how will they affect your mortgage application?
What are swap rates?
Swap rates, or interest rate swaps, are when two parties agree to exchange interest rate payments for a set period. One party accepts a fixed-rate payment and the other a variable.
This probably sounds as clear as mud if you don’t work in finance, so let’s add context: in the world of mortgages, the two parties would be lenders and financial institutions, and the ‘swap rate’ is the amount lenders pay to secure steady funding for the period in question.
In other words, when swap rates are high, it costs banks more money to secure the finance they need to provide products and services, like mortgages.
How do swap rates affect mortgages?
What borrowers need to know about swap rates is that mortgage interest rates tend to rise and fall with them. If swap rates rise, lenders usually recoup the extra cost by upping their mortgage rates. When they are low or in decline, better mortgage deals are available.
Swap rates are a hint of what interest rates are likely to be in the future. When they are on the rise, this is an indication that banks and financial institutions think rates will follow.
During times where swap rates are volatile, lenders tend to refresh their product range and introduce mortgage deals that will be profitable for them in the current climate.
It’s worth bearing in mind that swap rates are just one variable that lenders will take on board when deciding what mortgage rate to offer you. Other economic factors, such as the Bank of England’s base rate, are also relevant, as is your overall profile as a borrower.
What are swap rates doing right now?
After a period of volatility at the beginning of the year, swap rates are on the way down, and this is one of the reasons that mortgage interest rates have seen a dip of late too. Here are the latest swap rates in the UK:
- 1 year: 4.148%
- 2 years: 3.697%
- 3 years: 3.518%
- 5 years: 3.371%
According to our expert mortgage brokers, swap rates are forecast to keep declining, which bodes well for the future direction of mortgage interest rates.
If you are concerned about swap rates and want to know how they will impact your mortgage options, get in touch to book a free, no-obligation chat with one of our advisers.
