Rising swap rates put pressure on fixed deals

12 January 2011 | By Natalie Thomas, Samuel Dale

Since November 2010, two-year swap rates have increased from 1.31% to 1.72% and five-year swaps have gone from 2.18% to 2.82% in the same period.

Last week two-year swap rates were 1.62% and five-year swaps 2.75%.

David Hollingworth, director of communications at London & Country, says: “Swap rates have fluctuated over the last two years, but of late they have been on an upward trend.

“We have already seen evidence of lenders increasing their fixed rate mortgages because of swap rates and the sharper fixed deals are under threat.”

But Hollingworth adds that although swap rates play a part in lenders’ pricing they also look at other factors when setting fixed rates.

Alan Cleary, managing director of Precise Mortgages, says two-year swap rates have risen substantially in the past few months as a rise in the base rate looks more likely.

He says: “We are getting closer to a rate rise with every base rate decision and this is starting to affect the price of swap rates.

“Fixed rates, especially two-year rates, are on their way up and borrowers should look to fix now.”

Industry consultant Mehrdad Yousefi says high inflation is worrying the money markets and pushing up swap rates.

But he says: “Over the next four weeks fixed rate deals will cost more but it remains to be seen whether this will continue throughout the year.

“In the second half of the year when the base rate starts to rise, swap rates will start to predict the next base rate could start to rise and products will certainly become more expensive.”

Halifax raised the rates on its two-year fixes by 0.2% today and blamed the increased cost of funding and swap markets.

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