Mortgage Interest Rate Rise Imminent

Having enjoyed a race to the bottom over the last few months, is the tide about to turn for buy to let mortgage rates? Managing Director, Gavin Richardson, reveals the tell-tale signs and what landlords can do to make the most of the low rates while they last.

Over the last few months, we've thoroughly enjoyed the benefits of watching lenders continue to reduce rates, with one BTL lender going below 1% at the end of September. However, we're under no illusion that this can continue forever, and changes to SWAP rates suggest that a market correction is imminent.

What are SWAP Rates?

SWAP rates are essentially the way banks hedge their bets against what will happen to interest rates in two, three, five and ten years. As the name suggests, it's when two financial parties' swap' interest rates. Generally, if one party believes rates will rise, they'll want a fixed-rate payment, but they'll choose a variable rate payment if they think rates will fall. As with any bet, only one party can win, so experts will study the market and put down what they believe is likely to prevail.

For example:

A bank offers savers a 1% variable interest rate; it borrows cash from them and pays them 1% in return. The same bank lends that borrowed money to a homebuyer at a fixed rate of 3% over five years, meaning they make a 2% profit.

However, if interest rates rise, the bank is forced to pay savers 2% to stop them from moving to another bank. The mortgage rates are still fixed at 3%, so the bank's profits reduce to 1%.

In order to protect itself against a lower profit percentage, the bank agrees with another financial institution to replace the variable cost it pays to savers with the fixed rate owned by another party. As the other party is looking to replace its fixed rate with a variable, the swap is beneficial for both parties. And there is also the background considerations that bank regulators, PRA and FCA, do not like large “uncovered” SWAP positions resulting in lenders incurring forward costs whether their mortgage pipelines do or do not proceed to completion.

How do SWAP rates impact mortgage interest rates?

As SWAP rates directly link to banks' profits, rising SWAP rates indicate that experts believe interest rates will increase. Consequently, fixed-rate mortgages tend to increase in price but offer borrowers financial peace of mind that their repayments will not increase for a fixed period. When SWAP rates are low, variable rate mortgages could be more financially beneficial.

That said, it's not necessarily the case that mortgage interest rates immediately follow suit as SWAP rates rise. SWAP rates have steadily increased for the last couple of months, but we've still seen some lenders reduce rates in that time. Ultimately, mortgage lenders compete for business, so they need to balance new business and profits. However, there comes the point where the profit margin becomes too small, and lenders need to increase their interest rates on borrowing. Given the continued increases we're now seeing in the SWAP rates, UK inflation rates and lender activity, it's clear that mortgages rates will rise over the coming months. How quickly, and to what extent is harder to predict.

UK SWAP Rate

SWAP rates provided by TheIce.Com, rounded to three decimal places. Rates as at 13/10/21.

What should borrowers do?

Now, more than ever, you mustn't leave remortgages to the last minute, because the rates on offer in two or four months will not be as competitive as they are now. If you have a remortgage due in the next six months, you may be able to secure a new rate now, to start as soon as your current term ends. You may even find that you can save money by breaking your ERCs and remortgaging onto a lower interest rate (we can do all the maths for you).

Similarly, if you're looking to capital raise from your home or an existing buy to let property for future investment, but don't have a property lined up, don't worry. You can still capital raise now and have the funds ready for when you find the right property while securing a new competitive rate for your existing property.

Our team can complete a free review of your property finances to ensure you are getting the most out of your property portfolio. If there's a better deal available, we can help you refinance! Call our team today on 0345 345 6788 or email enquiry@mortgagesforbusiness.co.uk.

13th October 2021