The Intermediary Mortgage Lenders Association (IMLA) has launched a new report and adviser guide aimed at tackling one of the mortgage market’s most misunderstood concepts – why fixed-rate mortgages are driven by swap rates rather than the Bank of England base rate.
The trade body says confusion over swap rates remains one of the biggest challenges advisers face when explaining to borrowers why mortgage deals can suddenly disappear or become more expensive, even when the Bank Rate remains unchanged.
The publication, How lenders fund fixed-rate mortgages: Swap rates explained, has been written by IMLA principal researcher and former Bank of England economist Rob Thomas.
It is accompanied by a shorter five-minute guide designed to help advisers explain the issue in client conversations.
MARKET VOLATILITY
The report comes after significant volatility in financial markets earlier this year. Following conflict involving the US, Israel and Iran, two-year swap rates rose from around 3.6% in early March to more than 4.5% by early May.
During the same period, average 2-year fixed mortgage rates climbed from 3.97% to 5.14%.
IMLA says the episode highlighted the gap between borrower expectations and how mortgage pricing actually works, with many consumers assuming fixed rates move in line with decisions made by the Bank of England.
The association hopes the new resources will help advisers better explain why lenders can be forced to reprice or withdraw products at short notice when swap rates move sharply.
POORLY UNDERSTOOD
Kate Davies (main picture, inset), Executive Director of IMLA, says: “Swap rates have become part of the everyday language of the mortgage market, yet they remain poorly understood outside a relatively small group of specialists.
“When mortgage rates rise or products are suddenly withdrawn, borrowers want answers, and advisers need to be able to provide them confidently.
“The problem is that the real explanation – that fixed-rate mortgage pricing follows swap rates, not Bank Rate – is not well understood even by many professionals. Rob’s report provides a clear and authoritative account of how fixed-rate mortgages are funded and why swap rates play such a central role in their pricing.”
CONVERSATION WITH CONFIDENCE
She adds: “We recognise that not everyone wants to work through a detailed technical paper, which is why we have also produced a five-minute guide covering the essentials.
“Together, the two publications give advisers the material they need to have that conversation with confidence.”
The launch comes at a time when mortgage pricing remains highly sensitive to geopolitical events, inflation expectations and wider financial market sentiment, underlining the growing importance of advisers being able to explain the factors that influence fixed-rate borrowing costs.
Download the guide HERE.
