rate increase

Falling swap rates but mortgages rates remain unchanged

Average mortgage rates in the UK have remained stable over the past couple of months despite decreasing swap rates, according to new Moneyfacts data.

Swap rates, which are the interest rates at which prime banks borrow funds from each other, have fallen across the board since the beginning of May. The two-year swap rate has dropped to 0.74%, the five-year to 0.80% and the ten-year swap has fallen from 1.35% to 0.95%.

Despite falling swap rates, mortgage rates have remained stationary when the market would normally expect to see mortgage rates follow suit. While the average two-year fixed rate has risen from 2.47% to 2.49% since May, and the average two-year tracker has fallen 0.01% to 2.01%, both rates have remained unchanged since the beginning of June, and the average five-year fixed rate has also stayed stationary since the start of May.

Competitive rates for borrowers

This unusual state of play could be due to the warning issued by the Bank of England in May. Bank of England Deputy Governor Sam Woods said that regulators are watching a price war in mortgages “like a hawk”.

While a price war is good news for consumers, according to Woods, “the amount of capital being set aside to cover mortgages has been falling”, which increases the riskiness of loans on lenders’ books – the Bank of England recently forced Metro Bank to correct how much capital it was setting aside to cover mortgages.

Moneyfacts finance expert Darren Cook explains that stationary mortgage rates and the decline in swap rates “…could be a result of markets now reacting to the anticipation that the Bank of England is expected to increase the base rate before the end of 2019, following 12 months of economic uncertainty.

For borrowers, however, the good news is that with a difference between the average two and five-year fixed rates of only 0.36%, and between the average five and ten-year fixed rates only 0.16% – they can pay less for locking into longer-term financial security.

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