Ever wanted to understand more about interest rates and how your mortgage is affected by changes made by the Bank of England?
In this blog, we’ll explain what exactly interest swap rates are, and why they matter to home buyers as well as lenders. We’ll cover how they can affect your mortgage, and why it makes sense to stay aware of them. Read on to learn more..
So, what exactly is a swap rate, and what is an interest rate swap?
In the world of finance, the term “swap rate” (which is also called an interest rate swap) refers to the rate of interest that a lender agrees to pay to a financial institution in return for funds.
In an interest rate swap, a lender will pay a variable interest rate to a financial institution. The interest rate paid in this end is tied to a financial index. In exchange for this payment, the institution pays the lender at a fixed interest rate (the swap rate).
Then, in an agreement like a mortgage, the lender will offer a customer a fixed rate of interest in exchange for funds. To protect the lender from high swings in interest rate, the rates offered to customers are higher than the swap rate.
While swap rates are influenced by base rates, they are in fact two different things. The base rate is a figure set by the Bank of England and serves as a benchmark for interest rates across the UK.
The base rate is used to influence interest rates, not set them. Therefore, swap rates can be dependent on what the base rate is, but there are other factors at play. We’ll explain below:
Despite swap rates largely being an obstacle faced by lenders, they do have some implications to homebuyers:
When applying for a mortgage, different lenders will offer different levels of interest rates applied to monthly payments. These fluctuations are mainly influenced by swap rates. When rates are low, mortgage rates usually tend to follow suit. Low rates indicate a good time to take out a fixed rate mortgage, while higher rates may sway buyers towards a variable rate.
The rising and falling of swap rates is often directly linked to economic stability. If the currency you’re applying for has a sudden drop in value, swap rates will rise to make up the difference. These value drops can be down to a number of things, which can make swap rates difficult to predict.
When planning to buy your first, or next home, a great degree of preparation and certainty must be achieved. Not only must you have the funds available to put down a deposit on a home, you must also be confident in your ability to continually meet monthly payments.
Being aware of swap rates can greatly help with this process, adding yet another layer to your money management abilities.
If you’re finding it tough to budget or save, allow us to help. The Aldermore blog is full of useful guidance on managing your finances. From saving for home renovations to why saving monthly is important, our insights are here to help you.
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