What are swap rates UK and how do they impact mortgage rates?

When it comes to securing a mortgage, understanding the various factors that influence interest rates is important. One such factor is Sterling Overnight Index Average (SONIA) swap rates. In the United Kingdom, SONIA swap rates play a significant role in determining mortgage rates for many borrowers and have been frequently mentioned in the news. In this article, we will delve into what swap rates are and their impact on mortgage rates.

What is an interest rate swap?

An interest rate swap involves a contractual arrangement between two parties, wherein they agree to swap one set of interest payments for another over a specific duration.

What are SONIA swap rates?

SONIA replaced London Interbank Offered Rate (LIBOR) in 2021 as the primary interest rate benchmark in sterling markets. For mortgage rates, lenders use swap rates to protect themselves from interest rate risks and allow lenders to hedge the risk by locking in margins. By ‘locking in’, lenders maintain their margins even if the cost of funds increase, for example, this could be an increase in the base rate. The period can be for a range of terms of 1, 2, 3, 5, 7, 10, 15 or 30 years. Not every bank will choose to hedge using swap rates, some may choose to hedge naturally using saving bonds.

Swap rates reflect market expectations of the future direction of Central Bank interest rates. They are based on the assumptions surrounding what interest rates are expected to be over the term of the swap rate. These assumptions consider factors like inflation, prices of food, fuel, and the general economy which all feed into these forecasts. This is also the rate at which lenders use when setting a price to borrow funds to assist with their own supply and demand.

2-year UK swap rates

A 2-year swap rate is the average expectation of interest rates over the next two years

5-year UK swap rates

A 5-year swap rate is the average expectation of interest rates over the next five years.

Why are swap rates so volatile at the moment?

Swaps have become volatile due to many factors including numerous rises in the base rate, inflation data, market uncertainty and sentiment, and the war in Ukraine to name a few.

The volatility in swap rates has been constant since the Bank of England has been increasing the base rate. This movement in swaps became particularly volatile following the mini-budget in September 2022 and swaps jumped significantly in a very short space of time.

How do swap rates impact mortgage rates?

Swap rates only influence fixed rate mortgages: The higher the swap rate, the higher the mortgage rate before risk and lending appetite are considered. Lenders often see swaps as their cost of funding, and so they need to make a margin on top of these.

Rapid movement in swaps can make it hard for lenders to price their products appropriately. This is why we have witnessed many lenders pulling products temporarily during periods of high swap rate volatility as lenders read the market and settle on their repricing.

Some lenders may also temporarily withdraw mortgage products if they find themselves offering too competitive of a rate against their competitors following swap rate rises. Potentially if they don’t increase their pricing, they may become inundated with applications and unable to cope with demand. Despite what the press writes, mortgage products being pulled isn’t as scary as it can seem. The key part here is that mortgage lenders are still willing to lend with plenty of money to allow for this, and although the base rate is at the highest since October 2008, this isn’t a repeat of the same conditions of 2008.

When will swap rates and mortgage rates activity calm down?

While we unfortunately do not have a crystal ball and cannot see into the future, until inflation is controlled and the base rate has peaked and starts to fall, it can be assumed that swap rates will continue to fluctuate. The base rate rose by 0.5% to 5% on the 22^nd of June 2023, and the current forecast expects the base rate to average around 5.5% over the next three years (Bank of England).

What other factors impact mortgage rates?

It’s important to note that while swap rates serve as a reference point, lenders also consider other factors when determining mortgage rates. These factors include the Bank of England base rate, internal lender targets, service levels and competitor pricing, as well as many other factors.

Any increase to the base rate directly impacts tracker rates as these are directly linked to the Bank of England base rate. As the name suggests, monthly payments for those with a fixed rate mortgage will remain the same – these are not impacted by base rate movements during the fixed period. The full impact of the increase in the base rate to date will not be felt for some time, until needing to remortgage.

Swap rates and your mortgage

Swap rates in the UK play a crucial role in determining mortgage rates. By understanding swap rates and their impact on mortgage rates, this can help navigate the mortgage market more effectively and make informed decisions. We understand mortgage pricing is not so straightforward and can be quite tricky to get your head around. We are on hand if you have a question about mortgage pricing and how the financial market impacts your mortgage. We continue to monitor the mortgage and wider financial market to observe if any changes may impact our clients.

If your remortgage is due in the next six months, Private Finance can secure your mortgage offer now and lock in a mortgage rate, providing more peace of mind if rates rise further. This offers flexibility to continue to monitor rate movements over July and respond if conditions change.

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.

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In a higher interest rate environment, many homeowners are faced with the dilemma of whether to stay on their standard variable rate (SVR), switch to a tracker or choose to fix their mortgage. With the current economic climate and the uncertainty around interest rates, this can be a tough choice to make. In this post, we’ll take a look at the pros and cons of fixing your mortgage, so you can make an informed decision.

Fixed rate mortgages

Firstly, what does it mean to fix your mortgage? A fixed-rate mortgage is a type of mortgage where the interest rate remains the same for a set period, usually between two and five years. During this time, your monthly repayments will also remain the same, regardless of any changes to the Bank of England base rate.

So, should you fix your mortgage? Let’s take a closer look at the benefits and disadvantages of fixing your mortgage:

The benefits of choosing a fixed rate mortgage

• Predictable repayments: One of the main benefits of a fixed-rate mortgage is that your repayments will remain the same for the duration of the fixed term. This can be helpful if you’re on a tight budget and want to know exactly how much you’ll be paying each month.
• Protection against interest rate rises: If you fix your mortgage, you’ll be protected against any interest rate rises during the fixed term. This can be a big advantage if you’re worried about your monthly repayments increasing. Fixing your mortgage can provide peace of mind, knowing that you won’t be hit with any sudden increases in repayments.

The disadvantages of choosing a fixed rate mortgage

• Potential higher costs: Fixed-rate mortgages may be more expensive than choosing a variable rate mortgage if the rates fall during the fixed period.
• Limited flexibility: Once you’ve fixed your mortgage, you’re locked into that rate for the duration of the fixed term. This means you won’t be able to take advantage of any interest rate drops during this time. If you decide to pay off your mortgage early, you may be hit with early repayment charges. These charges can be significant, so it’s important to factor them into your decision.

How long should I fix my mortgage for 2023?

Choosing how long to fix your mortgage for is situational and largely determined by an individual’s circumstances. With the change in mortgage product pricing recently, it’s important to consider where you believe the direction of the economy and rates in the future will go, including where the base rate will peak and how fast this rate will fall.

Should I fix my mortgage for 2, 3, 5, or 10 years?

Deciding whether to fix your mortgage for 2, 3, 5 or even more years can be a difficult decision, as it will depend on your individual circumstances and your appetite for risk.

If you’re looking for certainty and peace of mind, a 5-year fixed rate mortgage may be the right choice for you. With a longer fixed term, you’ll have predictable repayments for a longer period, protecting yourself against any potential interest rate rises. Additionally, some lenders offer more borrowing power to those choosing longer-term fixed rates, which could be beneficial if you need to borrow a larger amount. While some borrowers may opt for an even longer fixed period of 10-years, a 5-year fixed mortgage is a more popular choice.

On the other hand, a 2- or 3-year fixed-rate mortgage could be a more suitable option for a borrower who wants certainty over their repayments but also believes mortgage rates will decrease once the fixed period has ended. You’ll have the option to re-evaluate your mortgage after 2 years and potentially take advantage of any interest rate drops. However, with shorter-term products, it’s important to consider the extra fees involved. Taking a longer-term fixed product means you can stretch these costs over a more extended period.

Ultimately, the decision between a 2 or 5-year fixed rate mortgage will depend on your personal circumstances and financial goals. It’s always a good idea to speak to a professional mortgage advisor who can help you weigh up the pros and cons of each option and make an informed decision based on your individual needs.

Should I get a fixed or variable rate mortgage?

There’s no one-size-fits-all answer whether someone should take a fixed or variable rate mortgage. In a frequently changing mortgage market, it can be an especially tough time to know which option is best. We look at some of the benefits to variable rate mortgages below.

Variable rates: Tracker rates, discount variable rates and standard variable rates

The benefits of a variable rate mortgage

Variable rate mortgages are useful because they can offer borrowers the opportunity to take advantage of changing interest rates and potentially save money. With a variable rate mortgage, the interest rate can fluctuate based on changes in the economy or the financial market, which means that the borrower’s monthly payments may increase or decrease over time.

In addition, variable rate mortgages typically offer more flexibility than fixed rate mortgages, as borrowers may be able to make additional payments or pay off their mortgage early without incurring penalties. This can be particularly useful for borrowers who expect to receive a windfall or who want to accelerate their repayment schedule.

The disadvantage of a variable rate mortgage

However, it’s important to note that variable rate mortgages also carry more risk than fixed rate mortgages, as borrowers may be exposed to rising interest rates that could increase their monthly payments. Borrowers should carefully consider their financial situation and their ability to manage potential changes in their mortgage payments before choosing a variable rate mortgage.

Is a tracker mortgage a good idea now?

There is an equilibrium point where a tracker would have been a better choice cost wise than choosing a fixed rate, and a borrower should analyse the cost comparison. It’s also essential to make sure you can cover the potential cost increases quickly, as we have seen how quickly rates have increased in the past.

Discount variable rates

Discount variable rates are often forgotten as another variable rate option, mostly available from many building societies. This might be a less volatile option than a tracker rate as lenders don’t always pass on increases to the base rate onto their standard variable rate.

Remortgaging in 2023: Should I fix now or wait?

So, should you fix your mortgage? Ultimately, the decision will depend on your individual circumstances and your appetite for risk. In short, if you want predictable repayments and protection against interest rate rises, fixing your mortgage could be a good option. There are pros and cons to fixing for 2-, 3-, 5- and 10-years. Likewise, if you’re looking for flexibility and lower initial costs, a variable-rate mortgage may be more suitable.

If you’re still unsure, it’s always a good idea to speak to a professional mortgage advisor who can help you make an informed decision. Whatever you decide, remember that your mortgage is a long-term commitment, so it’s important to choose the option that’s right for you.

Speak with an expert now or email info@privatefinance.co.uk

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.

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Why are mortgage rates decreasing despite the base rate rising?

This is a question many borrowers are asking at the moment. Despite the base rate increasing by 50 basis points to 4% last week, several lenders have decreased their fixed rates since and continue to do so this week.

For tracker rates this is a different story. This increase in the base rate will place tracker rates above some fixed rate products for the first time since the mini-budget.

Mortgage rates and the base rate are not directly linked.

Firstly, let’s clear up a common misunderstanding. Mortgage rates and the base rate are not directly linked. Mortgage rates are determined by many factors.

What factors are impacting mortgage rates now?

While there is a myriad of factors which determine mortgage pricing, the three main factors underpinning mortgage pricing at the moment are:

1. Internal Targets & Competitor Pricing
2. Bank of England Base Rate Changes
3. 5-Year Sonia Swap Rates

The first two points speak for themselves especially since all lenders have had new targets in January and are now trying to lend as much as they can at a competitive price in order to deliver those targets in 2023.

5-Year Sonia Swap Rates

So as we all know, the Bank of England Monetary Policy Committee increased the base rate by 50 basis points last week to 4%, which was in line with market expectations and deemed the right step to control inflation.

Contrary to past activity, mortgage rates continued to fall following the base rate rise.

The reasons for this are because the rise was in line with market expectations and markets believe that the Monetary Policy Committee are doing the right thing to cool inflation. This is also evident by the current 5-year SONIA swap rate which are at the lowest they have been since the mini-budget fiasco last year. The current 5-year SONIA swap rate decreased from around 3.8% to 3.5% over the last month.

The Bank of England now expects inflation to have reached its peak globally across many advanced economies, including the UK. Following the latest base rate rise, the BoE chief economist Huw Pill mentions it is important they did not raise borrowing costs too high and hinted this might be the last rate rise for the time being (Sky News).

So, what are swap rates and how do they impact mortgage rates?

Swap rates reflect market expectations of the future direction of Central Bank interest rates. They are based on the assumption surrounding what interest rates are expected to be over the term of the swap rate. For example, a 5-year swap rate is the average expectation of interest rates over the next 5 years.

These assumptions consider factors like inflation, prices of food, fuel, and the general economy which all feed into these forecasts. This is also the rate at which lenders use when setting a price to borrow funds to assist with their own supply and demand. These rates only influence fixed rate mortgages: The higher the swap rate, the higher the mortgage rate before risk and lending appetite are considered.

Lenders use swap rates to protect themselves from interest rate risks and allow lenders to hedge the risk by locking in margins. By ‘locking in’, lenders maintain their margins even if the cost of funds increase, for example an increase in the base rate. Not every bank will choose to hedge using swap rates, some may choose to hedge naturally using saving bonds.

At the end of September 2022, 5-year SONIA swaps were being priced around 5.5% (the highest level on record). Today, this rate sits much lower at 3.5%*. The reduction in swap rates means that getting a 5-year fixed rate mortgage should be significantly cheaper than in the months leading up to now. Let us remember that back in October 2022 we were talking about a 5-year fixed rates at around 6.5% while now they have dropped to around 4%.

Can we expect mortgage rates to continue to fall?

The expectations for mortgage rates are positive as not only are swaps edging down but the cost of fuel is also decreasing and annual CPI inflation is expected to fall to around 4% towards the end of this year (MPC, 2023).

A further rise in the base rate last week should see inflation drop further which will help to keep this moving in the same direction.

This government pledge is to halve inflation in 2023.

The reduction in the swaps is showing increasing confidence in a reduction in rates, over a five year period and therefore we could see base rate reductions as the year goes on.

If you’re coming to the end of your current mortgage deal or taking out a new mortgage, we can help you understand your options, taking into account your individual circumstances, deposit, monthly mortgage repayments, and help you make informed financial decisions.

Call us today on 0800 980 877 or email us.

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.

*SONIA SWAPS correct on 08/02/23.

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This is our take on what is currently happening in the mortgage market. Our views
are often cited in several national publications, including; The Times,
Telegraph, Financial Times, FT Adviser and Daily Mail, as well as a number of
key trade publications, so this should keep you ahead of the curve. If you have
any questions on any of these stories, or would like further information,
please do not hesitate to get in touch.

This week we discuss:

• Signs of normality in the lending environment? – Santander updates affordability rates
• Are Lenders becoming worried?

Signs of normality in the lending environment – Santander updates affordability rates

This week, Santander reduced all residential and most buy-to-let affordability stress rates, allowing clients to borrow more than before. Whilst we welcome this change and it’s a sign of normality in the lending environment on the horizon, limited details have been revealed on the extent to the changes.

As many will remember earlier in the year, the Bank of England confirmed they were withdrawing affordability tests, a test which assessed prospective borrowers’ ability to repay a mortgage. Few lenders made significant adjustments following this, and as the year progressed, affordability calculators have become more stringent in the increasing rate and inflationary environment. We hope this change by Santander encourages other lenders in the same direction now rates have reduced slightly.

Affordability Calculators

More stringent calculators have been a limiting factor for borrowing ability, particularly for buy-to-let mortgages. Now that fixed rates have fallen slightly, Santander has reversed some of their stricter affordability calculations, giving borrowing extra flexibility.

Despite this change though, most borrowers will find they are still more limited compared to years gone by. We continue to find that clients are restricted more so by affordability than income multiples, compared to the opposite a few years ago.

Are lenders becoming more worried?

Despite the positive attitude towards Santander’s latest change to affordability, are lenders still worried?

The latest change from TSB would suggest so, as since the 12^th of December, they have paused new build lending at 90% loan-to-value and surprisingly reduced loan-to-income (LTI) for self-employed individuals from 5.00 times to 4.49 times income.

What does this change mean?

In our view, this change implies that TSB is concerned about the future economy, possibly around house prices falling and negative equity (although they are still lending at 90-95% for second hand homes). Possibly TSB have looked to protect themselves in the lending-sphere by implemented similar measures as they did during the pandemic.

The increased cost of new builds and fears of property price corrections has made lending on new builds riskier. According to lenders, we hear with new builds there is often a ‘shiny factor’ in the price from the expensive integrated white goods and the high quality of the new build. The premium on pricing could easily be washed away as demand falls with growing fears of negative equity.

We are surprised by the changes to LTI as one could expect self-employed business to be more agile in this changing time. We hope other lenders do not adopt similar criteria.

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This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; The Times, Telegraph, Financial Times, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.

• Lender’s timescales finally improving in general – good news for borrowers
• Why fixed rates are falling and how the next base rate announcement may impact this

Why fixed rates are falling and how the next base rate announcement may impact this

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Should I choose a fixed or variable rate mortgage?

There’s no one-size-fits-all answer whether someone should take a fixed or variable rate mortgage. In a frequently changing mortgage market, it can be an especially tough time to know which option is best. However, since some fixed rates have started to reduce since the Autumn Statement, it is a good time to review whether now may be the time to lock into a fixed rate mortgage.

In this article, we analyse the benefits of both variable and fixed rate mortgages and why they may be suitable for your circumstances.

If you’re coming to the end of your current mortgage deal or taking out a new mortgage, our experienced consultants can help you understand your options, considering your individual circumstances, deposit, monthly mortgage repayments, and help you make informed financial decisions. You can speak to one of our mortgage advisors on an obligation-free basis by calling us on +44 (0)20 7317 2820 or alternatively by emailing us at info@privatefinance.co.uk

In this article we discuss:

• What has happened to fixed rates recently?
• The benefits and disadvantages of fixed and variable rate mortgages
• Should I lock in a fixed rate mortgage now?

What has happened to fixed rates recently?

After many mortgage rates jumped to comfortably over 5% (most lenders were 6%) following the mini-budget, considering a product which affords flexibility, such as a tracker or discounted variable rate, continued to be popular for those at the end of their product term or on a lender’s Standard Variable Rate, particularly those with no early repayment charges.

However, the lending environment is frequently changing and since the mini-budget, many lenders have been slowly reducing their fixed rates and re-introduced mortgage products. We have now started to see rates below 5%, for both a 2- and 5-year fixed mortgage products, enter the market.

The benefits and disadvantages of fixed and variable rate mortgages

The discussion around fixed and variable rate mortgages differ for the residential and buy-to-let (BTL) market.

Residential mortgages

The main benefit of a fixed rate mortgage is the certainty. The monthly mortgage payments will always be the same for the length of the product, regardless of interest rate movements, however, you will usually have to pay an early repayment charge (ERC) if you leave the product early.

Variable rates fluctuate depending on the wider economic and financial market. While this does make this the riskier option, a borrower may be able to reduce their total mortgage payments if the rate remains low for a substantial period of time compared to a fixed rate mortgage.

Buy-to-let mortgages

Choosing a fixed or variable rate for your BTL mortgage is more complex than just expectation of rates, security and flexibility required. Lenders carry out a stress test for fixed and variable rates to work out the maximum borrowing. These stress rates vary depending on which product you select, with a 5-year fixed typically being most favourable. If you are a landlord or would like to know more about how much you can borrow, our consultants can help you calculate the numbers while also considering your individual circumstances.

Should I lock into a fixed rate mortgage now?

Choosing whether to fix your mortgage right now is a personal decision and varies depending on an individual’s circumstances. Tracker and variable rates do appear quite competitive right now as they have not taken into account future base rate rises whereas fixed rates consider future anticipated increases. Greater than expected increases to the base rate could push mortgage rates significantly higher, making locking into a fixed rate deal right now all the more attractive. On the other hand, we may find that inflation settles down over the next two years and lenders reduce fixed rates further.

Other factors to consider are risk appetite and ability to react to fluctuations in monthly repayments. Many individuals prefer the stability and certainty of a fixed rate mortgage, whereas others are able to accept the risk of fluctuating mortgage repayments.

The best way to be absolutely sure that you have accounted for all of the operative factors when deciding on your mortgage is to speak to a qualified mortgage consultant. They will take the time to understand your unique circumstances, and will use their up-to-the-minute, expert understanding of the mortgage market to provide you with an informed recommendation of the type of product that is best suited to you.

If you would like to discuss your mortgage-options with a qualified professional, you can speak to one of our mortgage advisors on an obligation-free basis by calling us on +44 (0)20 7317 2820 or alternatively by emailing us at info@privatefinance.co.uk

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage. 

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Private Finance Mortgage Memo

This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; The Times, Telegraph, Financial Times, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.

• Falling fixed rates – Calls for borrowers to re-review and what it means for lenders
• Lenders increase ERCs as cost of funding increase
• Older borrowers downsizing and equity release mortgages

Falling fixed rates – Calls for borrowers to re-review and what it means for lenders

As fixed rate mortgages start to reduce, we urge borrowers who have applied for a fixed rate mortgage product since the mini-budget and are yet to complete on their mortgage to re-review and ensure there isn’t a better rate available for them.

Why should borrowers re-review their options

The lending environment is frequently updating, and many lenders have reduced rates and re-introduced mortgage products since the mini-budget and chaos in the mortgage market. There may be more options available in the lending atmosphere for borrowers compared to when they applied for their mortgage over the last two months, including more competitive options.

Do brokers re-review applications?

We hear some horror stories about other mortgage brokers who do not bother to re-view or clients who went direct to the lender for their mortgage who are unaware a better rate is available. Your broker will not necessarily review your mortgage application without prompt so make sure to do so. This could mean the difference of thousands of pounds saved and avoiding being locked into a high rate 5-year fixed mortgage with high early repayment charges.

What does this mean for lenders?

Changing your application to another lender or rate does cause lenders additional work as they may lose the business they have done over the last few months, however many accept that currently this is a cost of doing business. Some lenders may have room to reduce rates at the moment but don’t want to cause themselves extra work in changing existing rates if they do make changes.

The other side of this coin is there are very low barriers keeping clients from re-reviewing after offer if they have time, and so could move lenders

Lenders increase ERCs as cost of funding increase

From this week, Nationwide are increasing their early repayment charges (ERCs) as the cost of funding increases and lenders pass this cost onto borrowers. The changes increase the ERC charge by 0.5% in every year of the 2- and 3-year mortgage product with an ERC, and only the last three years of the 5- and 10-year mortgage product with ERCs, also by 0.5%.

What has happened to ERCs historically

We campaigned for lenders to reduce their ERCs when rates were historically low, however only the bigger lenders such as Barclays, Nationwide and NatWest changed their ERC models. Now that rates have increased, lenders costs of funding also increased, and so it does make sense for lenders to do this but will be a hit for borrowers in the future especially if rates reduce.

With borrowers in mind through, we do hope many lenders do not adopt similar changes, as this adds extra costs and reduces flexibility for clients. We recently actually saw Santander improve their ERC structure, going from a flat structure to tiered.

Older borrowers downsizing and equity release mortgages

It is a harder time for older borrowers than it has been for a while. There are fewer options for older borrowers, and of these options, they are significantly more expensive.

Although changes to the State Pension will benefit millions of pensioners across Great Britain, the cost-of-living crisis will stretch many household budgets, especially as we enter the cold winter months. In a high-rate environment, the cost of later life borrowing and equity release mortgages are higher, and as a result we could see more older people downsizing earlier, particularly with the extra temporary saving of £2,500 in Stamp Duty costs until April 2024.

 Later Life Mortgages

Older borrowers have several options when looking to refinance, for example later life lending and equity release mortgages. In the present environment, later life mortgages are more expensive and as these are often interest-only they are more sensitive to rising interest rates. These payments could possibly double if a borrower needed to refinance right now vs a rate 2 years ago.

Equity Release Mortgages

While we don’t advise directly on equity release mortgages, when speaking with other advisers we are seeing that rates are a lot higher than they have been for a few years. We are also seeing the LTVs achievable on these mortgages are a lot lower due to the rates being higher. If the interest is being rolled up over a period of time, this impacts the LTV that is achievable.

Potential to free up housing stock

Older borrowers with larger houses have had little incentive to downsize in the past as Stamp Duty costs have meant the costs savings by moving into a smaller house are smaller. However, higher energy bills and the temporary savings on Stamp Duty could incentive many older borrowers to downsize, particularly those who cannot afford to refinance in the high-rate environment. We could see housing stock of larger homes freed up earlier than planned as a result.

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