Falling swap rates suggest greater buyer affordability is just around the corner

Mortgage rates are forecasted to fall as lenders take advantage of cheaper funding after figures show that average swap rates have started to fall.

That's according to specialist property lending experts, Octane Capital, who analysed average swap rates over 30 and 60-day periods to predict what could be in store for the market as we approach an expected base rate reduction from the Bank of England on 1st August.

What are swap rates?

Mortgage market swap rates reflect the price lenders have to pay financial institutions when securing fixed rate funds, which they use to offset short-term risks associated with fixed rate mortgages. They are generally based on government bonds called Gilt yields, which reflect what the market anticipates will happen to interest rates down the line.

In sum, the cost of swap rates filter through to mortgage rates, whether they rise or fall - and currently they're falling.

Falling swap rates

With the UK economy finally showing signs of improvement and with inflation falling to the target rate of 2%, it's widely expected that a cut to interest rates is on the cards in August - A year on since the Bank of England increased the base rate to its peak of 5.25% in August 2023.

And it seems that the mortgage sector is already responding in anticipation, with swap rates showing early signs of decline.

The analysis by Octane Capital shows that, over the past 30 days, swap rates have declined at an average daily rate of -0.22%. In contrast, the 30 days prior saw swap rates increase at an average daily rate of 0.06%.

The trend also holds true when analysed over a longer period of time.

Over the last 60 days, swap rates have fallen by an average of -0.08% daily, compared to an average daily increase of 0.13% over the previous 60 days.

CEO of Octane Capital, Jonathan Samuels, commented:

"With inflation finally falling to within the Bank of England's target rate of two per cent, there's a high chance that we could see a cut to interest rates come August, a year on from them hitting their recent peak of 5.25%.

We're already seeing swap rates start to reduce in anticipation of a potential base rate cut and we expect this trend to continue as the next Bank of England decision approaches.

This will be welcome news for mortgage holders who have seen the cost of their repayments climb considerably in recent times, and so too for prospective buyers who have had to reevaluate their position in the market due to increased borrowing costs."