What Is Lender Funding?

You are probably wondering why are the mortgage rates being offered by lenders so different from the start of the year?

Last month, the Bank of England increased interest rates again to 2.25% – their highest level in 14 years. The gap between the Bank of England base rate and fixed rates for mortgages is getting ever-wider, and of course, the fallout from the recent mini budget has added new uncertainties into the market.

The cost of borrowing has been historically low in the years since the financial crisis and so lenders have priced mortgages in a way that offers good value to borrowers. The difference between fixed rates for mortgages and the bank base rate is also down to how mortgage rates are funded.

Lender’s funding comes from a number of sources including customers’ savings, government funding schemes and wholesale markets which can change quickly depending on the wider economic context.

“The ongoing war in Ukraine, the energy crisis and soaring inflation has impacted the environment in which the industry is operating over the last few months,”

Chris Lees, Mortgage and Protection Director at Resolve Financial Solutions.

For fixed rate mortgages, lenders use swap rates, where two different parties swap interest rates. That means the price of a fixed rate mortgage is based on the price at which they can borrow in the swap market.

The bank base rate has gone up by 2.15 per cent over the last year, going up from 0.10 per cent to 2.25 per cent. But at the same time, two-year swap rates, which drive funding costs for fixed rate mortgages, have gone up by 5.10% (from 0.44% to 5.56% as of 26th September 2022).

Swap rates reflect forecasts on what the Bank of England base rate may be in the near future, and with widespread expectations that interest rates will continue to climb, that’s directly impacting on the swap market.

But the increase in swap rates has changed the operating environment considerably, and lenders are under pressure to act quickly in response to fluctuations in the market.

The current inflation crisis is having widespread and unpredictable consequences and mortgage rates are just one area where this is visible.

We are speaking with our clients as early as possible so that they can make informed decisions around their product choice. If you would like to speak to us about your current mortgage or your remortgage options then please get in touch.

*Please note: Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Scroll to Top