SWAP and SONIA Rates

So if you are looking to buy a property why would the red-head 80’s pop star be something you need to follow, or at least learn a little about!?

Well it’s not her, although those tunes were catchy, SONIA is short for “Sterling Overnight Index Average”…..yep, snore I know.

But this is basically the pot of money that’s available for financial institutions to borrow from, and the cost of it, but the interest cost is fluid or should we say unstable.

So, they want to swap that rate, for a fixed one, from a bank…enter SWAP rates.

It’s ok, this is not an acronym although (Seriously What A Palava), but ultimately these rates dictate what your mortgage costs, and that is pretty important.

So, let’s say a lender wants to buy some money from SONIA at 3% for 5 years, but unfixed and therefore volatile, they will then swap that with, say NatWest for a fixed rate of 4.5% and then offer you a mortgage of 5.0% (most mortgages are 0.5/0.6 above Swap rates btw).

NatWest make a nice profit daily although they have a bit more risk, but obviously wouldn’t do it if they felt the rates were going to go mad, and the lender makes a guaranteed 0.5- 0.6 % over the 5 years.

That, basically is that.

Currently the Swap rate on 15^th May 2024 for a 5-year rate is 3.95% and for 2 years is 4.49% and as this is the normal mortgage term deal, you can see why rates are 4.5 to 5%.

Now, if you are still here, and haven’t decided to watch paint dry, - what affects the Swap rates, the SONIA rates and most importantly my mortgage rate, because that’s what we all really care about?

Three things that would change the rates, both up and down are derivatives, guilts and believe it or not …sentiment.

The predicted value of derivatives and guilts are for all intense and purpose based on what experts think will happen in the future, global stability, a change of Government pandemics’….you name it.

These all add to the huge melting pot of a basic’ feel good’ factor which is baked into everything.

Now, the last thing I would do is to pretend I know about those guilts and Government bonds, that is wayyyyy above my pay grade, but when it comes to Swaps and SONIAs….this time I know it’s for real…..cue the music!