Fix your mortgage now - rates are rising!

If you fancy fixing your mortgage, you need to get a move on!

A new report from the Bank of England has sent the money markets in to a swim, with some experts predicting fixed rate mortgages are about to start increasing in price.

It all comes down to swap rates. But what on earth are they?

What are swap rates?

Before we go any further, a quick explanation of what swap rates are would not go amiss. In the words of the Council of Mortgage Lenders: "A swap rate is the notional cost of exchanging a Libor-level floating income stream for a fixed stream."

They have quite the way with words, don't they?

In plainer English, the swap rate is the rate the mortgage lender pays when they borrow large amounts of money from other banks and investors in the money markets, specifically for the purpose of lending that money out to you and me in fixed rate mortgages. Lenders borrow this money for a fixed period and, as a result, can secure the funding over the sort of terms that match the lengths of their fixed rate range – two years, three years, five years, ten years, and so on.

They are heading northwards

And swap rates are back in the news after they jumped pretty sharply a week ago, and have continued rising. So what’s the story?

It’s all down to the Bank of England’s inflation report. The fact that the central bank admitted there were ‘significant uncertainties’ regarding the future of inflation, coupled with the admission that there are serious risks of inflation remaining above target for some time to come, really set the markets off.

Why? Because the markets are worried that this report might mean the Bank of England will be forced to increase the Base Rate in the near-ish future, which will then increase the cost of borrowing for banks. And investors in the money markets, being quite financially savvy by nature, don't want to get caught lending out their money to banks for years today at a rate that will be relatively low and unprofitable in the future.

So, within hours of the report, the five-year swap leapt from 2.13% to 2.25%, a significant jump. By this week it had reached 2.37%. It wasn’t alone. Between November 11th and November 15th, two-year swaps moved from 1.43% to 1.50% and three-year swaps moved from 1.73% to 1.81%. Month on month swaps two-year swaps are up 0.28%, three-year swaps are up 0.27% and five-year swaps are up 0.29%.

It all makes sense, once you think about it...

Bad news for borrowers

Unfortunately, although you might think the rate of your mortgage has absolutely nothing to do with what's going on with inflation and the money markets, there is a significant risk that the rate increase will filter down to you.

After all, if the cost of securing the funding for mortgages goes up, lenders are likely to follow suit by raising their mortgage rates, in order to maintain their current (extremely healthy) profit margins.

Having said that, it’s worth noting that swap rates are not the only thing that influence the pricing of fixed-rate mortgages, so there is not an automatic correlation between swap rates rising, and fixed-rate mortgages therefore doing the same. However, they are most definitely a major factor in the pricing of fixed rates, and if they continue on this upward trajectory, lenders will start getting twitchy.

Why fixing makes sense

With bank base rate still at such an incredibly low level, taking advantage of a variable mortgage can seem mightily tempting, particularly when you can pay 1.99% on your mortgage.

However, it’s still a gamble. All you know for sure if you opt for a variable rate is that, at some point, your mortgage payments are going to rise. And if base rate rises quicker than expected, you may find your payments jump out of your reach. Which is a very scary thought, indeed.

It may be the conservative option, but I much prefer the security of a fixed rate, and therefore knowing what I’ll be paying every month. Historically, current fixed rates are seriously low at the moment, so it makes sense to try to take advantage of that for as long as you feasibly can.

That’s why I’m still an advocate of fixing for five years, or even longer. Sure, the rate you pay will be a little higher than a two-year fixed rate, but by fixing for the longer term you remove the need to shop around for a new rate in a couple of years, as well as the sizeable product fee you’ll probably have to shell out in order to secure that next mortgage.

Jumping through hoops

However, the fact remains that actually getting hold of mortgage finance is really tough at the moment. Both August and September saw the lowest levels of gross mortgage lending for those months in a decade.

For me, that just makes it even more important to take advantage of the help on offer from an expert mortgage broker, who will be able to steer you in the direction of lenders that actively want to lend to borrowers that fit your profile. Be sure to pick the brains of our mortgage team over at the lovemoney.com mortgage centre, where you can get great fee-free advice via email, instant messenger or even over the phone.

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.