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Why Property Investors Need To Understand Swap Rates

by | Nov 22, 2023 | Clients

As a property investor, you are used to keeping a close watch on mortgage rates, looking for the best deals. But are you still watching the Bank of England base rate closely, or do you understand how swap rates impact your fixed mortgage rate instead? While swap rates may sound complex, they play an important role in determining mortgage rates and can offer valuable insights for investors.

What are swap rates and how do they affect mortgage rates?

In the financial world, swaps are agreements between two parties to exchange cash flows from different assets over a specified period. These cash flows can be fixed or variable, making swaps a versatile financial tool – and a good way for mortgage lenders to raise funds.

When a lender wants to offer fixed-rate mortgages to customers, but needs to manage the risk of fluctuating interest rates, they engage in interest rate swaps. The swap rate is the fixed interest rate demanded by one party in the swap to compensate for the uncertainty of paying the variable (floating) rates the other party wants to exchange over a set period. The swap helps lenders lock in a fixed interest rate for a specific amount, ensuring they can offer fixed-rate mortgages without worrying about the variable rate changing.

What does this mean for property investors?

When swap rates rise or fall, this affects the cost for lenders of obtaining fixed-rate cash flows. This then impacts the mortgage interest rate they offer to customers. However, while swap rates have a significant impact on mortgage rates, there are other factors which will also influence these.

For property investors, understanding the connection between swap rates and mortgage rates can be a valuable tool. While mortgage rates have started to decline, there is no guarantee that they will continue to and it is worth keeping an eye on swap rates