It can feel as though we’ve been living in a state of near constant crisis for the best part of two decades.
Financial shocks, political upheaval and global events have become an almost permanent backdrop.
Even so, the recent conflict in the Middle East came as a shock, abruptly disrupting what had been a relatively settled period for financial markets.
Only days ago, with inflation continuing to ease, many commentators expected the Bank of England to continue cutting the Base Rate as early as this month.
Those expectations have now been firmly reset.
Since the conflict began, mortgage lenders across both residential and buytolet markets have pulled fixed-rate products at pace, Paragon included.
According to Moneyfacts, the scale of mortgage withdrawals in the immediate aftermath of the strikes was second only to the period following the 2022 mini budget. At the same time, average mortgage pricing began to edge higher.
For landlords, this understandably raises a simple and reasonable question – if the Bank of England Base Rate hasn’t moved, why have mortgage rates?
Apologies to those who understand this already, but I thought it may be pertinent to explain the mechanics of the mortgage market to offer an explanation.
The answer lies in how fixed rate mortgages are priced. Mortgage rates are not based on today’s Base Rate, but on where markets expect interest rates to be in the future. These expectations are reflected in what are known as swap rates.
Swap rates are set in wholesale financial markets and move daily in response to expectations around inflation, economic growth, energy prices and wider geopolitical risk.
They are, in effect, a forward looking measure of where interest rates are heading over a given period.
Lenders rely on swap rates to manage risk. When a lender offers a fixedrate mortgage, it is committing to keep that rate unchanged for two, five or sometimes even ten years, regardless of what happens to wider interest rates.
To protect against the risk of rates rising during that period, lenders typically use the swap market to lock in a fixed funding cost for the same term.
This is why two year and five year swap rates are so important. When swap rates rise sharply, the cost of providing fixed rate mortgages increases. In some cases, that can quickly erode the margin on a product, making it commercially unviable to continue offering at that price.
We’ve seen this dynamic before, most notably in the aftermath of the 2022 mini budget.
We’ve seen it again in recent weeks, as the war has pushed oil prices higher and reintroduced inflationary pressures into the economic outlook.
As lenders, withdrawing products at short notice is never something we want to do. Our role is to provide stable, reliable funding to support landlords and the wider housing market. It is frustrating when external events limit our ability to do that.
However, it is equally important that lenders remain financially stable and operate sustainably. Reacting quickly to changing market conditions is a necessary part of ensuring the longterm health of our businesses and, by extension, the broader financial system.
We recognise that this can be challenging for landlords planning purchases or refinancing. But understanding the mechanics behind mortgage pricing helps explain why rates can move quickly, and sometimes unexpectedly, even when the Base Rate itself stands still.