Swap rate pressure leaves little room for cuts, with energy costs the key wildcard
HSBC will increase rates across its residential and buy-to-let mortgage ranges from Tuesday, with brokers given until midnight on Monday to submit applications in full and secure existing product codes.
The timing is notable. The increase comes just days after a cluster of rate cuts from several major lenders had begun to shift market sentiment, with brokers reporting more positive client conversations after a difficult autumn of rising prices. That momentum now faces a fresh test, as rising swap rates continue to push up lender funding costs regardless of what the Bank of England does with its base rate.
Nicholas Mendes (pictured top), mortgage technical manager and head of marketing at John Charcol, said the direction of travel for 2027 remains uncertain but the risks are skewed in one direction. "Mortgage rates are likely to stay around today's levels in 2027, although the risk is that they edge higher rather than lower," he said.
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The swap rate disconnect
Swap rates – the costs lenders pay to fix their own borrowing over two or five years – have risen sharply over the past year, pushing fixed mortgage pricing higher even as the Bank of England has held its base rate at 3.75%. Financial markets are currently pricing in a series of rate increases over the next 18 months, driven largely by concern that energy-driven inflation will require a more aggressive policy response. Until that outlook shifts, the pressure on fixed mortgage costs is unlikely to ease.
Mendes said the link between swap rates and what borrowers pay at the counter is direct and often misunderstood. "The rates lenders charge on fixed mortgages are closely linked to swap rates, which are what banks pay to secure money at a fixed cost for two or five years," he said. "Those costs have risen by around one percentage point over the past year and have continued to climb over the past month."
Higher oil, gas and fuel prices are the primary force behind market expectations of further rate rises, with inflation already back above 3% and the Bank of England forecasting it could climb above 4% early next year. That outlook is being priced into swap rates now, which is why fixed mortgage costs are moving before the Bank has made any formal decision. For borrowers and brokers alike, waiting for an official signal before acting may mean the market has already moved on.
Two years or five?
One of the more unusual features of the current market is how little separates two- and five-year fixed pricing. With lender funding costs on both terms sitting close together, the rate difference available to borrowers has effectively collapsed, and in some cases, longer fixes are now the cheaper option. That is a significant shift from the normal market dynamic, where two-year deals have typically offered lower headline rates in exchange for less certainty.
Mendes said that dynamic changes the conventional calculus around term length. "Choosing a shorter fix only pays off if rates fall significantly over the next two years, which runs against what markets expect," he said. "A five-year fix offers longer certainty, but the trade-off is flexibility, as leaving a fixed rate early usually means paying a penalty, and these charges can be larger on longer deals."
Borrowers with plans to move home, increase their borrowing or see a significant change in income should weigh portability and early repayment charges as carefully as the headline rate itself. The right answer will depend heavily on individual circumstances, and the narrowing gap between terms makes that conversation more nuanced than it has been for some time.
An outlook that could shift quickly
Despite the current pressure on pricing, Mendes cautioned against assuming the trajectory is fixed. Market pricing tends to reflect a worst-case view of the rate path, he noted, and a sustained fall in energy costs could improve the outlook faster than many expect – with lenders moving to reprice within days of any shift in their funding costs, potentially ahead of any formal Bank of England rate decision.
That possibility offers some comfort, but for the significant number of households coming off deals fixed in 2021 or early 2022, the near-term arithmetic is difficult regardless of what follows. Moving from a rate of around 1.5% onto today's best available fixed deals represents a material jump in monthly costs on almost any loan size, and many borrowers will be doing that calculation for the first time without a broker's guidance. Mendes said that reality, more than anything else, will shape the conversations brokers are having with clients through 2027.
"The biggest change in 2027 will come from the deal people are leaving rather than the one they are moving to."
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