The Mortgage Finance Blog

Swap rates are the rates at which lenders "buy" money at a fixed rate. The price of fixed rate mortgages and loans are dependant upon the price at which the banks can borrow the money.

LIBOR (London Interbank Offer Rate) represents the cost of short term borrowing and is the interest rate charged to a bank to borrow a sum of money for the period (generally 3 months).

Swap rates on the other hand, refer to a borrowing at a fixed rate of interest. The rate charged will depend upon the duration of the swap (fixed rate) and the current forecasts for future lending rates.

Fixed rates (at the time of writing) are over 3% above bank base rate (BBR). BBR is currently at 0.5%, but it will not stay that way forever. Economists are talking about a return to more normal base rates over the next 12 to 24 months. These predictions are used as the basis for swap rates and therefore longer term swap rates are on the up.

As all lending institutions' fixed rates are based upon swap rates, any increases of rate are passed on to new customers. Variable rates such as trackers are based upon LIBOR and therefore tend to reflect the short term outlook.