Swap rate data offers glimmer of hope for borrowers

With average swap rate climbing every month since interest rates started to increase, newly released data highlights a new emerging trend and suggests that a much-needed reduction in mortgage rates could soon be on the cards for borrowers.

Related topics:  Finance,  mortgages,  Rates
Property | Reporter
20th July 2023
Mortgage transaction 739
"Swap rates, while erratic from one day to the next, do start to portray where the market is heading over time and help us preempt whether the cost of borrowing is set to rise or fall"

What are swap rates?

Mortgage market swap rates are the price lenders have to pay financial institutions when securing fixed-rate funds and have to be large enough to mitigate any risk associated with offering fixed-rate mortgages. They are generally based on Gilt yields which reflect what the market anticipates will happen with regard to interest rates further down the line.

In short, if swap rates rise, so too do mortgage rates and vice versa if they fall.

The analysis by Octane Capital shows that the average monthly price of swap rates has been largely increasing every month since interest rates first started to climb in December 2021 - with the exception of just two monthly declines seen in November of last year and January this year.

So far this month (July), the average swap rate price has already increased by 9% versus June, up from 5.716 to 6.213.

However, there are signs that the market could be starting to stabilise and, not before long, homebuyers and remortgagers could see the cost of borrowing start to fall.

Throughout 2022, swap rates increased at an average monthly rate of 18% per month. So far in July, this average monthly rate of growth has slowed to just 9% per month.

Even when analysing January and July of last year only, the average monthly rate of growth still sits at 22%, highlighting that while swap rates have continued to climb, they are doing so with less ferocity than was seen in 2022.

What’s more, when analysing the change in swap rates on a daily basis, there are further signs of positivity. On the 11th of July, 1-year swap rates sat at 6.32, but have since reduced to 6.12 as of the 18th of July.

Similarly, five-year swap rates have also reduced from 5.62 on 11th July to 5.24 as of 18th July.

CEO of Octane Capital, Jonathan Samuels, commented: “Swap rates, while erratic from one day to the next, do start to portray where the market is heading over time and help us preempt whether the cost of borrowing is set to rise or fall.

"As the data shows, they have been increasing pretty much since interest rates started to climb when viewing the market on a month-to-month basis, which echoes the wider mortgage market landscape when it comes to the higher cost of borrowing facing buyers and remortgagers at present.

"However, there are initial signs that this tide may be starting to turn and this suggests that the market is expecting lower rates than previously thought. Only time will tell if this will be the case, however, this is certainly a glimmer of positivity within an otherwise gloomy economic picture.”

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