Banks

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Economy

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Currencies

Asia markets tentative ahead of Opec meeting

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

Barclays: life in the old dog yet

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Categorized | Property

Rising swap costs hit mortgages


Posted on May 30, 2014

What does this show?

It’s the interest rate on five-year swaps, which is now back above 2 per cent.

Five-year swap rates have almost doubled since May last year, but two-year swaps, which are more sensitive to base rate expectations, have risen more since the start of this year.

In the middle of March, two-year swaps were still below one per cent, but rose to 1.16 per cent by mid-May, according to weekly swap data supplied by broker SPF Private Clients. Five-year swaps were priced at 1.98 per cent at the end of March, but had reached 2.08 per cent by mid-May.

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What are swaps?

Banks and building societies use a variety of funding sources for mortgages, including retail savings deposits – which must account for at least half of building societies’ funding. But money from the interbank markets is also a major source of funds, and swaps allow lenders to insure against rising interest rates.

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    Isn’t the base rate the benchmark?

    Tracker mortgages tend to be linked to the Bank of England’s base rate, which has been at an all-time low of 0.5 per cent since March 2009. But lenders use swaps to price fixed-rate mortgages.

    The swap market is an indicator of where the market thinks the base rate might be heading.

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    Do rising swap rates mean dearer mortgages?

    The increase suggests the era of inexpensive mortgage deals is ending, according to mortgage brokers.

    “As we move closer to the point at which the base rate is expected to climb, the swap rates reflect this,” said David Hollingworth of broker London & Country.

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    Should I fix my mortgage rate now?

    “Some people think borrowers should hold firm before the base rate moves, but fixed rate mortgages are already more expensive by then,” Mr Hollingworth added.

    Mark Harris, chief executive of SPF Private Clients, noted that although the cost of swaps has gone up, mortgages rates have not risen by the same amount because lenders are competing to attract business.

    “The margins banks have applied to swap rates have come down because of competition. They’ve worked on smaller margins compared to a year ago,” said Mr Harris.