Gary McKenna, consultant mortgage broker at Mortgages for Business looks at the role of swap rates in determining fixed rate mortgage pricing.
You may question the mental stability (or possible absence of having a ‘life’) of someone who wakes up thinking that a blog about SWAP rates will make interesting reading.
However, I would ask that you humour me as this may well save you money.
I appreciate that there will be a temptation to skip to the ‘money saving bit’ but I would ask you to first read the small amount of theory below regarding SWAP rates and their impact on fixed rate mortgages as it may prove quite interesting…
The pricing of a fixed rate mortgage is determined by several factors, but mostly it comes down to how cheaply the lender was able to obtain the money to lend out in the first place – the SWAP rate.
Put simply, a SWAP rate is a fixed interest rate at which a lender buys money for a certain period of time - normally from one to 10 years, although most commonly two, three, five and 10 year SWAP rate programmes are used. These are then used to create fixed rate mortgage products.
SWAP rate pricing is based upon what the money markets see as the likely average rate over the chosen time frame, factoring in expectations of future interest rates and inflation.
Based on estimations this means SWAP rates can sometimes be cheaper than prevailing variable rates and result in fixed rate mortgage products that are not only attractive but also provide the borrower with certainty of knowing their exact monthly mortgage payment going forward, (even after the lender has added its margin).
With “uncertainty” being a common word used by mortgage market professionals and the press at the moment, I suggest that the most pragmatic approach for property investors going forward would be to base borrowing decisions on certainty.
Personally I am a keen promoter of five year fixed rates. Although pricing tends to be higher for five year money than for their two year counterparts, in the long run I believe they often offer a better deal.
The money saving bit…
So, enough of the theory and my preferences, now let me explain how you could save money by taking SWAP rates into account and planning for the future.
If you came to me today asking for a two year fixed rate I could offer you an excellent deal, but what about when that initial deal comes to an end? You will be picking from the pricing available at the time which is likely to be higher than it is today. And what about the fees that come with remortgaging?
By selecting a five year rate instead and you are free from any possible rate rises in the next five years and will only need to pay remortgage fees once every five years, instead of every two.
In a similar conclusion to my blog on why you should consider five year fixed rates, each individual (or company) needs to consider the best approach for their needs and requirements, i.e. if you want to release equity every two years and can stomach the fees then two year fixed rates and tracker products may be for you.
However, if you are in it for the long term and what the security at the cheapest five year money that we have seen in my living memory, then select a five year fixed rate.
I am happy to review your portfolio free of charge to see if I can save you money.
Simply send over your existing portfolio details or download our review form, fill it in and email it back over to me.
I’m equally happy to source rates for new purchases.
And finally, I am mentally stable and not as boring as the above makes me sound.
Gary McKenna has left Mortgages for Business for pastures new. For more information or for any questions relating to this blog, please contact the Buy to Let Team on 0345 345 6788, where one of our consultant mortgage brokers will be happy to assist.
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12th July 2016