Swap rates hit three-year high, lifting fixed mortgage costs

UK swap rates hit a three-year high in the week to 3 September. The five-year swap rate passed 4.52%, its highest level since October 2023 (the Guardian, 3 September). Swap rates are the rates banks charge each other to borrow, and lenders use them to price fixed mortgages, so a move there reaches your refinance.

I am writing eleven days after that report. Every rate below is the position on the source's date, not live pricing today.

What does a three-year high in swap rates do to a portfolio?

From a portfolio perspective, this is not one payment going up. It is every product expiry you have queued over the next few years, repricing off a higher floor. If you hold eight or ten properties those expiries rarely land together, and that spread is the part investors miss.

Tom Simpson, managing director of homes at Yorkshire Building Society, told the BBC that swap rates were 0.7% above where they were a year ago (the Guardian, 3 September). He put the rise over the preceding week at 0.1 percentage points. That was below the 0.5 percentage point increase in the 10 days after the first US and Israeli airstrikes on Tehran. He advised borrowers worried about the move to speak to an independent mortgage adviser.

I run it across a leveraged book rather than a single loan. The expiries that fall due while swaps sit high reprice off that higher floor. The cheapest deals you struck in the old cycle jump furthest. Our free BTL (buy-to-let) stress test calculator shows what a higher rate does to your ICR (interest cover ratio), the rental income test a lender applies at a stressed rate.

Is the Bank of England about to raise rates?

As at 3 September, markets were not expecting the Bank of England to raise rates at its policy meeting later that month (the Guardian). The Bank's chief economist, Huw Pill, used a speech in Edinburgh reported that day to argue against waiting. "We cannot wait for uncertainties to resolve themselves before acting," he said. Pill was one of three Monetary Policy Committee members who called for a rate rise in July and were outvoted.

The pressure came from outside the housing market. A jump in oil prices, after the US and Iran exchanged fire in the week to 3 September, fed fears of higher inflation and pushed investors out of bonds. The yield (the return a bond pays its holder) on UK 10-year government debt reached its highest level since 2008 for a second day. It retreated as oil fell. Brent crude dipped 0.6% to 95 dollars a barrel (the Guardian, 3 September).

Russ Mould, investment director at trading platform AJ Bell, said mortgage, credit card and auto loan rates will rise if bond yields rise (the Guardian, 3 September). Lenders do that to preserve their loan book margins. Our negotiation and finance blog hub collects our writing on brokers, lenders and rate negotiation.

What I'd do with this information

The first thing I do is list every expiry by date rather than by property. The question is how much of my debt reprices in a single quarter, and whether that quarter lands while swaps are elevated.

Then I re-run the ones nearest the edge. A property that cleared its stress test at the old rate may not clear it at the new one, and that is where a refinance turns into a cash call. Our property investment strategies hub goes deeper on structuring a portfolio for that.

And I keep it in proportion. Coventry Building Society was the first mainstream lender to raise fixed rates, across its whole range for new and existing residential and buy-to-let borrowers (the Guardian, 3 September). Average fixed rates themselves were unchanged on 3 September, at 5.59% for a two-year fix and 5.63% for a typical five-year deal, according to Moneyfacts figures cited by the Guardian.

Over the cycle, one quiet week in the swap market changes very little. The refinance schedule underneath it changes a lot, and our free property resources are a reasonable place to start mapping yours.

Key takeaways

• The five-year swap rate passed 4.52% in the week to 3 September, its highest since October 2023 (the Guardian).

• Swap rates were 0.7% above where they were a year ago, per Yorkshire Building Society (the Guardian, 3 September).

• The rise over the preceding week was 0.1 percentage points, below the 0.5 percentage point move in the 10 days after the first US and Israeli airstrikes on Tehran.

• Average fixed rates were unchanged on 3 September, at 5.59% for a two-year fix and 5.63% for a five-year (Moneyfacts figures cited by the Guardian).

• One mainstream lender had already repriced its entire fixed range for residential and buy-to-let borrowers by that date.