There have been many prophecies as to what might happen if the UK fails to agree a deal before leaving – including Bank of England governor Mark Carney reportedly warning that in a worst-case no deal scenario house prices could fall by 35% over the next three years.
Yet there has perhaps not been the same degree of consideration given to what the implications might be if a deal is struck and approved by parliament.
The road to Brexit has been long but it’s potentially nearing its end and as we witnessed on the day of the referendum result, the markets can move quickly, inevitably resulting in winners and losers.
So, could swap rates be one casualty of a Brexit deal?
Record low rates
Currency markets were left reeling from the fallout of the vote to leave the European Union back in June 2016, with the pound seeing a monumental drop in value within the day.
The property market – especially the prime London market – has also seen a gradual and progressive downturn.
One clear winner however in the months following the result were swap rates and as a knock-on effect of that, fixed rate mortgages.
Two-year swap rates fell to around 0.576% by the end of June 2016, with five-year swaps 0.668% and ten-year swaps 1.044%.
This, coupled with a low Bank of England base rate and a healthy appetite from lenders, has resulted in some record low fixed rates, making them the preferred option for both our buy-to-let and residential high net worth clients.
Increasing cost of funds
Just like the Brexit negotiations themselves, swap rates are particularly volatile at the moment.
They can move up or down daily, often reflecting whether Brexit talks are positive or negative.
If a deal is agreed by parliament, we are likely to see swap rates increase and we could see fixed rates move quickly.
They have already increased since their lows of June 2016 and at the time of writing, two-year swaps are currently around 1.228%, with five-year swaps 1.491% and ten-year swaps 1.704%.
Swap rates are a reflection of what the money markets foresee the average interest rate to be over a certain time frame and longer-term swaps in particular could see a climb, as the economic data gets better and lenders factor in better economic returns over the duration.
Chancellor Philip Hammond has promised a “Brexit dividend” if a deal is struck and an end to austerity – all of which could lift economic growth further, bring inflation down and increase the probability of a rise in the Bank of England base rate.
While this scenario would no doubt boost investors’ confidence and be good news for the property market, one consequence could be increasing swap rates.
First signs of increase
There are already some suggestions that the swap market could be starting to turn.
Knight Frank’s October prime London lettings index showed the average fixed-rate deal rose slightly to 2.27% in August 2018 from 2.09% in January.
Of course, swap rates are not the only determiner for lenders’ pricing and healthy competition should ensure rates stay relatively low.
Nonetheless there is every chance an agreed Brexit deal could spell the end for the record low rates the market has enjoyed, which means if any of your clients are thinking about fixing, now might certainly be a good time to do so.