Swap rates. What are they and why should you know about them?

Swap rates. What are they and why should you know about them?


What are Swap Rates?

Swap rates, also known as interest rate swaps, allow two parties to exchange interest rate cash flows over a specified period. In the context of mortgages, banks and lenders use interest rate swaps to manage their own exposure to interest rate fluctuations.

So in easier terms, a swap rate is a rate based on what the markets think interest rates will be in the future. If the rates rise, then mortgage lenders will look to increase their rates so that they don’t lose out. 

Meaning if swap rates go down, mortgage rates tend to go down. If they go up, so do mortgage rates too.

At the moment, swap rates have continued to fluctuate and, in recent months, increase, leading to rate rises across the market.

How do Swap Rates Impact Mortgages?

Swap rates play a crucial role in determining the cost of fixed-rate mortgages offered by lenders. Banks and lenders use the swap rate as a reference when pricing fixed-rate mortgage products for borrowers. The swap rate represents the cost at which lenders can borrow funds on the wholesale market for the duration of the mortgage term.

Why are Swap Rates Important for Home Buyers?

For home buyers considering a fixed-rate mortgage, understanding swap rates is essential for several reasons. Two include: 

  • Mortgage Pricing: Swap rates influence the pricing of fixed-rate mortgages. If swap rates are low, fixed-rate mortgages may be more attractive to borrowers, as they can lock in a stable interest rate for a longer period.
  • Predictability: Fixed-rate mortgages offer predictability in monthly repayments, as the interest rate remains constant over the agreed-upon term. Home buyers who prefer stability in their budgeting often opt for fixed-rate mortgages.

It’s important for home buyers to consult with mortgage advisors or brokers who can provide up-to-date information on swap rates and help them navigate the complexities of mortgage products to make the best decision based on their financial situation and preferences.