Prospects of Reduced Mortgage Rates in Sight as Swap Rates Decline

Mortgage rates in the UK are poised for a decrease next year, spurred by the opportunity for lenders to utilize more cost-effective funding. This trend emerges as data reveals a continuous five-month decline in average swap rates.

This forecast is provided by Octane Capital, a specialist in property lending, who have meticulously examined the average monthly swap rates over the past year. Their analysis aims to anticipate future market trends, particularly in light of the recent decision on the base rate by the Bank of England.

Understanding Swap Rates
Swap rates in the mortgage market are essentially the cost borne by lenders when they acquire fixed-rate funds from financial institutions. These funds serve as a hedge against the risks associated with fixed-rate mortgages. Predominantly influenced by Gilt yields – government bonds – these rates mirror the market’s expectations of future interest rate movements.

The crux of the matter is that the trajectory of swap rates, whether upward or downward, directly impacts mortgage rates. Presently, these rates are on a downward trend.

Recent Trends in Swap Rates
The Bank of England is anticipated to maintain the base rate at 5.25% for the third consecutive time. The last adjustment was in August, with a 0.25% increase. However, enhanced market stability since then has led to a downward revision in swap rates.

December witnessed the one-year average swap rate drop to 5.20%, a 2% decrease from November and marking the fifth consecutive month of decline from a July peak of 6.09%. The five-year swap rates have also decreased, averaging 4.32% in December, down from 4.48% in November, after a consistent decline from a July peak of 5.25%.

Despite being higher than at the year’s start, these trends suggest an impending reduction in mortgage rates.

Reasons Behind the Falling Swap Rates
Since August 2023, the Bank of England’s base rate has remained unchanged, indicating an end to the period of rapid rate increases. The base rate had escalated from 0.1% in December 2021 to 5.25% in August 2023, a measure to combat inflation, which had peaked at 11.1% in October 2022.

As of October, the CPI inflation has receded to 4.7%, down from 6.3% in September, edging closer to the Bank’s target rate of 2%. The current swap rate activity suggests that market confidence is leaning towards a potential cut in the Bank of England’s base rate rather than an increase, which is likely to lead to lower mortgage rates in the new year, even before an official rate cut.

Expert Insights
Jonathan Samuels, CEO of Octane Capital, shared his insights:

“Falling inflation indicates that the Bank of England’s strategy over the past two years is bearing fruit, with the reduction in headline inflation primarily driven by decreases in food and energy prices. Core inflation remains persistent, so we anticipate the rates to be held for a third time this week. However, this is still positive news for mortgage holders who have recently faced rising repayment costs. The consistent drop in swap rates in recent months is promising, hinting that borrowers can look forward to more affordable mortgage rates soon as lenders pass on these benefits.”