Swap rates, which partially influence mortgage pricing, started to fall in December following better-than-expected inflation figures, leading many lenders to cut mortgage rates at the start of the month.
However, swap rates started to climb slightly last week, raising concerns that this could slow, or even reverse, the pace of mortgage rate cuts.
Brokers have said that the increases have been minor and while this could slow the pace of rate cuts, it would not halt them completely.
According to Chatham Financial, a two-year swap stands at 4.07 per cent, down from 4.2 per cent last week. A five-year swap stands at 3.51 per cent, a fall from 3.63 per cent last week.
Alex Maddox, capital markets director at Kensington Mortgages, said that swap rates of one per cent were a “thing of the past but hopefully so are swap rates of six per cent”.
He added: “Last summer saw a peak of 6.20 per cent for two-year swaps and since then there has been a fairly steady decline to just below four per cent in early January. Mortgage rates have also come down as a result.
“The main reason for that fall from six per cent to four per cent was due to the reduction in CPI. At the same time, data on the economy has been weak, which the market has viewed as an opportunity for the Bank of England to cut rates in late 2024 and 2025.”
Maddox said that most recently swap rates had started to increase which could curtail some of mortgage rate reductions.
He explained: “The main reason for this is a concern that tensions in the Middle East will impact supply chains and put pressure on prices to increase, thereby delaying or reducing the ability of the Bank of England to make the base rate cuts we had been expecting.”
Chris Sykes, technical director at Private Finance, agreed that the heightened risk in the Middle East, especially in the Red Sea, had led to swap rates increasing.
“With the large number of imports that go through this area, if goods have to be diverted through other routes the costs increase significantly and these costs would be passed onto consumers.
“Obviously if costs of imports and goods go up then this risks inflation increasing at points in the future which would mean the Monetary Policy Committee have to respond to this. Their response likely wouldn’t be to raise rates anymore, but it would maintain rates at current levels for longer, which affects swap rates,” he noted.
Sykes continued that there was “some meat on the bone with rates, not much meat but enough of a margin for most of the rate cuts that we have seen to stay at these levels”.
He said that The Co-operative’s sub-four per cent mortgage was currently sourcing at the top of many searches, and it was “too competitive so we don’t expect these to last for long”.
“We expect lenders that haven’t made rate cuts in a while to bring down their rates so the average rates will continue to reduce, but we don’t expect to see many more “best buys” or headline rates,” he noted.
Swap rate increases could impact lenders differently
Reece Beddall, sales and marketing director, Bluestone Mortgages, agreed that while swap rates had decreased towards the end of last year there has been an increase at the start of this year.
“Swap rates increasing has generally indicated uncertainty in the market. While there might be more optimism this year, there is still a sense of the unknown that we suspect has played a part in the growth of swap rates as of late,” he noted.
Beddall continued: “A rise in swap rates could impact lenders differently depending on their funding vehicles and how they hedge their funds. However, the events of the past few years have equipped lenders with significant experience in navigating swap rate volatility.
“This is highlighted by the fact we’re still seeing lenders across the mainstream and specialist market cutting interest rates each day, despite the rise in swap rates this year.”
He noted that both brokers and lenders were “more optimistic for 2024” and there was a “sense of greater stability in the market, which will be helping potential borrowers get on the property ladder”.
Beddall said: “The market is very competitive and provides opportunities to borrowers to find the cheapest deal possible.
“If you’re a prospective homeowner and unsure of where to go, don’t shy away from looking to brokers for support. It is their duty to signpost to the best deals based on individual circumstances.”
Sykes said that borrowers who were remortgaging should look at things six months early as deals can be locked in and if things “settle down and rates continue to drop, you can usually improve the rate”.
“If purchasing, from what we are seeing at the moment things shouldn’t change too much, but they could. So, no time like the present to lock a rate in, if wanting a fixed. Same rules as above apply with improving rates,” he added.
