Are mortgage rates about to go up? Budget sees swap rates spike

Mortgage costs could rise after Rachel Reeves’ Budget led to a spike in swap rates, which influence the pricing of fixed-rate mortgages.

Fixed-rate mortgage pricing is largely based on Sonia swap rates – the inter-bank lending rate, based on future interest rate expectations.

When Sonia swaps rise sufficiently it often results in fixed mortgage rates going up, and vice versa when they fall.

As of today, five-year swaps have risen to 4.04 per cent, up from  3.87 per cent on 29 October – the day before the Budget. They are up from 3.7 per cent a week earlier.

The lowest five-year fixed rate mortgage is currently 3.79 per cent – and it is rare for the lowest rates to be below the equivalent swaps like they are now.

Only three major mortgage lenders have announced rate changes since the Budget. 

Virgin Money and Halifax have both announced they will be increasing rates while Santander has gone the other way and said it will be lowering rates.

If swap rates remain where they are currently, we are likely to see mortgage rates rise, according to Mark Harris, chief executive of mortgage broker SPF Private Clients.

‘Swap rates rose on the back of the Budget but this could be a knee-jerk reaction rather than a sustained period of higher rates’, he said.

‘Only time will tell – if swaps remain at elevated levels for a while, lenders may have to reprice higher.

‘Lenders have been repricing this week – some increasing rates, others reducing pricing in order to attract new business. 

‘Borrowers looking for a mortgage should plan ahead and speak to a whole-of-market broker to find the best deal available to them.’

Nicholas Mendes, mortgage technical manager at John Charcol, expects this to be a short-term blip. He expects mortgage rates to fall over the coming months.

Mendes is predicting that the lowest mortgage rates could fall to around 3 per cent next year.

‘From a mortgage perspective, any immediate interest rate changes following the budget are unlikely to alter the medium-term trend in base rate reductions, though they may influence the pace of cuts’, said Mendes.

‘I anticipate that the downward trend in mortgage rates will resume before the end of the year, likely returning to the best rates we’ve seen recently, with further improvements next year.

‘However, it’s essential for borrowers to remember that current fixed mortgage rates already factor in some expected base rate cuts over the coming year. 

‘Consequently, I expect the lowest fixed rates to stabilise around the low 3 per cent range next year.’