UK EXPAT MORTGAGE GUIDE
Understand what SONIA swap rates are, why they move and how they can influence the pricing of UK fixed-rate mortgages for British expats, overseas landlords and foreign nationals.
For information only. Mortgage products, rates and lender criteria can change at short notice and eligibility depends on individual circumstances.
SONIA stands for Sterling Overnight Index Average.
SONIA is an important UK interest-rate benchmark administered by the Bank of England. In simple terms, it reflects the average interest rate paid on eligible overnight sterling transactions between banks, other financial institutions and institutional investors.
Unlike a forecast, SONIA is based on actual transactions. The Bank of England calculates and publishes SONIA every London business day.
Think of SONIA as a measure of the overnight cost of sterling money in wholesale financial markets.
While SONIA measures overnight transactions, SONIA swap rates relate to interest rates over longer periods.
You may therefore hear financial commentators and mortgage professionals referring to rates such as:
| Rate | Period |
|---|---|
| Daily SONIA | Overnight |
| 2-year SONIA swap | 2 years |
| 3-year SONIA swap | 3 years |
| 5-year SONIA swap | 5 years |
| 10-year SONIA swap | 10 years |
An Overnight Index Swap (OIS) involves exchanging payments linked to a fixed interest rate for payments linked to the compounded overnight rate over the life of the contract. For sterling OIS contracts, that overnight benchmark is SONIA.
For mortgage borrowers, the 2-year and 5-year swap markets are particularly useful to understand because two- and five-year fixed periods are commonly used in UK mortgage products.
This is where mortgage borrowers can easily become confused.
Bank Rate is the official interest rate set by the Bank of England’s Monetary Policy Committee.
SONIA is an overnight interest-rate benchmark calculated using transactions in the sterling money markets.
SONIA swap rates relate to financial contracts extending over periods such as two, five or ten years.
| Bank Rate | SONIA | SONIA Swap Rates | |
|---|---|---|---|
| What is it? | Official Bank of England interest rate | Overnight sterling benchmark | Longer-term swap-market rate |
| Who sets/calculates it? | Bank of England MPC | Bank of England | Financial markets |
| Looking at | Current monetary policy | Overnight transactions | Longer periods |
| Relevant to fixed mortgages? | Yes, indirectly | Indirectly | Particularly relevant to understanding fixed-rate pricing |
When a mortgage lender offers a fixed rate, it takes on interest-rate risk.
Imagine a lender offering you a five-year fixed mortgage. You know the interest rate you will pay during those five years. The lender, however, still has to manage its funding costs and exposure to changes in interest rates.
Financial institutions use instruments including interest-rate swaps to manage or hedge interest-rate exposure. Consequently, movements in swap markets can influence the economics of providing fixed-rate mortgages.
However, falling swap rates do not automatically mean mortgage rates will fall immediately. Swap rates are an important factor, but they are not the only factor.
This is one of the most useful aspects of swap rates for borrowers to understand.
Financial markets are forward-looking.
Suppose the Bank of England leaves Bank Rate unchanged, but new inflation figures are higher than markets expected. Investors may begin to think that interest rates will have to remain higher for longer.
Swap rates could consequently rise. Mortgage lenders may then reprice some of their fixed-rate products.
So, a borrower could wake up to find that a five-year fixed mortgage has become more expensive even though the Bank of England hasn’t changed Bank Rate at all.
The reverse can also happen. Markets may become convinced that inflation is falling and future interest rates could be lower. Swap rates could start falling before the Bank of England reduces Bank Rate.
Not every mortgage rate change is caused by swap rates. A mortgage lender has its own commercial considerations.
For example, a lender could introduce a highly competitive mortgage and receive far more applications than expected. It may then increase the rate or withdraw the product to control the volume of new business and maintain its processing times.
Lenders can also have internal targets or funding allocations for different types of mortgages. They may want more — or less — business in areas such as:
This helps explain why two mortgage lenders can react differently to the same financial-market conditions.
There isn’t one single factor. Financial markets continually reassess what could happen to inflation, the economy and future interest rates.
Higher-than-expected inflation can increase expectations that UK interest rates will remain higher for longer.
Markets pay attention to more than the headline Bank Rate decision. Monetary Policy Committee voting, inflation forecasts and comments about the economy can all affect expectations.
Employment and wage-growth figures can influence expectations about inflation and future monetary policy.
Weak economic data can increase expectations of lower future interest rates, while stronger-than-expected data can sometimes have the opposite effect.
Changes in oil and gas prices can influence inflation expectations and therefore expectations for future interest rates.
Government bonds — known as gilts — and interest-rate swaps are different markets, but both can respond to changing expectations about inflation, interest rates and the UK economy.
The UK does not operate in isolation. Developments involving the US Federal Reserve, European Central Bank and international bond markets can also influence UK financial markets.
For an expat borrower, a change in mortgage pricing can sometimes have a greater impact than it would for a straightforward UK-resident borrower.
That’s because not every UK mortgage lender lends to expats. Those that do can have very different criteria.
A lender may consider:
If one competitive expat mortgage disappears, there may therefore be fewer equivalent alternatives available.
A lender could announce a product withdrawal late in the UK afternoon. For a borrower in Australia, Singapore, Hong Kong or another overseas location, that announcement may arrive outside normal working hours.
For expats, understanding the wider mortgage market can therefore be particularly useful when a mortgage decision needs to be made.
Both can be useful, depending on the mortgage you’re considering.
If you’re looking at a 2-year fixed expat mortgage, movements in two-year swap rates can provide useful market context.
If you’re considering a 5-year fixed mortgage, five-year swap rates are particularly relevant.
Trying to predict exactly where swap rates — or mortgage rates — will go next is extremely difficult.
For an expat approaching the end of a fixed-rate mortgage, it may be more useful to establish:
Swap rates can provide useful information about the market. They shouldn’t be treated as a reliable way of predicting the precise mortgage rate you will be offered in the future.
If you want to understand the market yourself, start with authoritative sources.
The Bank of England administers SONIA and publishes information explaining the benchmark and how it is calculated.
Historical SONIA information can be accessed through the Bank of England’s statistical database.
The Bank publishes UK yield-curve information, including data relating to sterling Overnight Index Swaps.
Following these sources can help you understand the broader direction of the interest-rate market.
If you remember nothing else from this guide, remember these five points:
Yes. SONIA swap rates are one of the important factors that can influence UK fixed mortgage pricing, particularly when considering two- and five-year fixed rates.
However, lenders also consider their funding costs, margins, competition, risk and appetite for new mortgage business.
Because fixed mortgage pricing is influenced by expectations about future interest rates, not simply today’s Bank Rate.
If markets expect inflation or interest rates to remain higher for longer, swap rates can rise and lenders may reprice fixed mortgages even though Bank Rate itself hasn’t changed.
Bank Rate is the official interest rate set by the Bank of England’s Monetary Policy Committee.
SONIA — the Sterling Overnight Index Average — is an overnight interest-rate benchmark based on actual eligible sterling transactions.
SONIA swap rates relate to longer periods and can help provide an indication of how financial markets are pricing interest-rate exposure over time.
SONIA itself measures overnight sterling transactions.
SONIA swap rates relate to interest-rate swaps covering longer periods, such as two or five years. This distinction is important when looking at fixed mortgage pricing.
Both can provide useful information. Two-year swaps are particularly relevant when looking at the market for two-year fixed mortgages, while five-year swaps provide useful context for five-year fixed mortgages.
Neither should be viewed as a direct prediction of the mortgage rate a lender will offer.
No. Falling swap rates may give mortgage lenders more scope to reduce fixed rates, but lenders don’t necessarily pass reductions on immediately.
Their decision will also depend on competition, margins, funding and how much new mortgage business they want.
Yes. Mortgage products can be repriced or withdrawn at relatively short notice.
This could be because market conditions have changed, but it could also happen because the lender has received enough applications or needs to manage its processing capacity.
They are better viewed as a market indicator rather than a mortgage-rate prediction tool.
Swap-rate movements can help explain the direction of fixed mortgage pricing, but they cannot tell you exactly what a particular lender will charge tomorrow, next month or later in the year.
Both are relevant, but they tell you different things.
Bank Rate tells you about current Bank of England monetary policy. Swap markets are forward-looking. Looking at both can therefore provide a better understanding of fixed mortgage pricing than looking at Bank Rate alone.
They can help explain why the cost of a UK expat mortgage or expat buy-to-let mortgage may change without a corresponding change in Bank Rate.
But the mortgage available to an expat will also depend on individual lender criteria, including country of residence, income currency, employment status, loan-to-value and property type.
SONIA swap rates can help you understand why UK fixed mortgage rates are moving. They can’t tell you which mortgage is right for you.
For an expat borrower, your country of residence, income currency, employment status, property, loan-to-value and whether you are buying or remortgaging can all affect the lenders and products available.
If you’re living overseas and considering a UK expat mortgage, expat buy-to-let mortgage or UK expat remortgage, speak to our experienced expat mortgage team.
We can review your circumstances, explain the options currently available and help identify lenders that consider applications from borrowers in your position.
Speak to our expat mortgage team about your UK mortgage options.
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