Mortgage rates are forecast to continue falling as lenders take advantage of cheaper funding.

Specialist lender Octane Capital has so-called swap rates over 30 and 60-day periods to predict what could be in store for the market as we approach a possible base rate reduction from the Bank of England on August 1.

Mortgage market swap rates reflect the price lenders have to pay financial institutions when securing fixed rate funds, which they use to offset short-term risks associated with fixed rate mortgages. 

They are generally based on government bonds – Gilts – which reflect what the market anticipates will happen to interest rates down the line.

In sum, the cost of swap rates filter through to mortgage rates, whether they rise or fall, and currently they’re falling.

With the UK economy finally showing signs of improvement and with inflation at its target rate of 2.0% it’s expected by some analysts that the base rate will drop from 5.25% to 5.0% next Thursday. 

The mortgage sector is already responding in anticipation, with swap rates showing early signs of decline.

The analysis by Octane Capital shows that, over the past 30 days, swap rates have declined at an average daily rate of -0.22%. In contrast, the 30 days prior saw swap rates increase at an average daily rate of 0.06%.

The trend also holds true when analysed over a longer period of time. Over the last 60 days, swap rates have fallen by an average of -0.08% daily, compared to an average daily increase of 0.13% over the previous 60 days.

Octane chief executive Jonathan Samuels says: “There’s a high chance that we could see a cut to interest rates come August, a year on from them hitting their recent peak of 5.25%. We’re already seeing swap rates start to reduce in anticipation of a potential base rate cut and we expect this trend to continue as the next Bank of England decision approaches.

“This will be welcome news for mortgage holders who have seen the cost of their repayments climb considerably in recent times, and so too for prospective buyers who have had to reevaluate their position in the market due to increased borrowing costs.”