The guide, which accompanies a report, explains how swap rates – rather than the Bank of England’s base rate – inform the pricing of fixed rate mortgage products.
The IMLA said this is contrary to what many borrowers assume and is not an easy thing for mortgage advisers to explain – something its two publications have been designed to address.
How lenders fund fixed-rate mortgages: Swap rates explained was written by Rob Thomas, principal researcher at the IMLA and former economist at the Bank of England. It details the behaviour of fixed rate mortgage pricing and how most UK lenders fund themselves using deposits and other variable-rate sources. It also unpacks how the swap market allows lenders to offer fixed rate products and why sudden swap rate movements can force short-notice product withdrawals.
Meanwhile, Swap Rates Explained: A Five-Minute Read is a summary of the key points for advisers who need a clear, accessible explanation they can use in conversations with clients.
The IMLA said the relationship between swap rates and mortgage rate-setting was thrown into sharp relief earlier this year, when two-year swap rates rose by almost 1% from March to May due to the outbreak of the conflict in the Middle East. Over the same time, average two-year fixed mortgage rates increased from 3.97% to 5.14%.
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The IMLA noted that tracker mortgage rates, which follow the base rate directly, were unaffected by the volatility.
Kate Davies (pictured), executive director of the IMLA, said: “Swap rates have become part of the everyday language of the mortgage market, yet they remain poorly understood outside a relatively small group of specialists. When mortgage rates rise or products are suddenly withdrawn, borrowers want answers, and advisers need to be able to provide them confidently.
“The problem is that the real explanation – that fixed rate mortgage pricing follows swap rates, not bank rate – is not well understood even by many professionals. Rob’s report provides a clear and authoritative account of how fixed rate mortgages are funded and why swap rates play such a central role in their pricing.
“We recognise that not everyone wants to work through a detailed technical paper, which is why we have also produced a five-minute guide covering the essentials. Together, the two publications give advisers the material they need to have that conversation with confidence.”
