Despite the recent Bank of England Base Rate reduction, many mortgage lenders are increasing product pricing. What’s causing mortgage rates to rise?
Many mortgage lenders have increased their product pricing since the Bank of England Base Rate reduction. Here, we look at why mortgage rates are rising (albeit only marginally) and what causes them to increase.
What are SWAP rates?
SWAP rates are what lenders will pay other banks and financial institutions to borrow money for a fixed period, for example, two or five years.
Lenders borrow money against SWAP rate pricing and then lend it to mortgage borrowers. When pricing their mortgage product ranges, lenders ensure they have a set profit margin above SWAP rates.
When SWAP rates come down, lenders’ cost of funds reduces, which means they can charge you less on your mortgage. Conversely, when SWAP rates rise, lenders must increase their rates to maintain their profit margins.
It’s important to note that SWAP rates do not react to Bank of England Base Rate (BBR) changes; instead, SWAP rates factor in predictions for BBR. This is why when BBR reduces, we see little change to the capital markets, as this will have been anticipated long before the BBR change.
Read more about SWAP Rates on our Money Markets page.
Recent SWAP rate increases
When lenders look at the cost of SWAP rates, they look at the average cost of BBR over a set period. For example, two-year fixed-rates reflect the predictions for BBR over the next two years.
Applying this to the current market, recent changes in the UK economy, such as the October Budget, mean that while BBR will continue to reduce over both a two- and five-year period, it will come down at a slower pace. Consequently, the average Base Rate will be slightly higher and SWAP rates have had to increase to take this into account.
Over the last few weeks, SWAP rates have fluctuated, settling at higher levels than we have seen for a few months. Therefore, lenders have had to raise their fixed-rate products in line with an increased cost of funds.
Why have SWAP rates increased?
Three main factors have contributed to a rise in SWAP rates.
Firstly, the Autumn Statement has knocked the capital markets to an extent, as the increases in public spending over the next few years may be inflationary.
Secondly, the Budget introduced a tariff on US imports, which may cause stagflation in the UK.
Lastly, experts forecast higher inflation for 2025, which will undoubtedly affect the Base Rate.
These factors could cause the Monetary Policy Committee (MPC) to cut BBR more slowly, which accounts for the increase in SWAP rate pricing and, consequently, mortgage rate pricing.
What will this mean for fixed mortgage rates?
We expect that the money markets will settle again following the influx of announcements in the Budget. The current spike in movement in mortgage rate pricing is reactionary and should soon slow down, allowing for rates to soften.
By the end of 2024, we expect SWAP rates to come down slightly and, with them, a reduction in fixed mortgage rates. However, we’re unlikely to see rates return to their previous levels, but instead a reduction of circa 0.1-0.15%. Looking ahead to 2025, mortgage rates will continue to decrease, but again, this will be slower than initially expected.
If you’re approaching the end of your current fixed-rate term, it’s best to secure a mortgage deal sooner rather than later. Many lenders (although not all) will allow you to ‘lock in’ to a mortgage rate up to six months before your current one ends and then move on to their cheaper products if one becomes available before you complete. This means you can hedge your bets against rising rates and still secure a competitive deal either way.
Next Steps
To explore the rates that you could access now, use our FREE buy to let calculator.
Alternatively, have one of our brokers find the most cost-effective mortgage rate for your unique circumstances. With access to the whole market and some exclusive products from leading buy to let lenders, we’re best placed to help you secure your next mortgage. Get in touch here or call us on 0345 345 6788.
