Current global issues have positive long-term finance effect

10th March 2020

Stuart Buchanan of Acuitus Finance looks at how movements in long-term swap rates are impacting the availability of property investment finance.

“As I write this on March 9th, current global issues have reduced long-term swap rates to levels I never expected to see.

“During the past six months, we have previously reported on long-term fixed rates that were lower than the Bank of England (BOE) base rate, but with the 10-year swap rate on March 6th at an amazingly low 0.48% this meant you could potentially fix a rate for 10 years at 0.27% less than the BOE base rate. At the same time, the five-year swap rate fell to 0.37%.

“The market is clearly pricing in base rate cuts with the expectation that they will stay low for a long time. However, as students of swap rates will know, when life looks more positive then low long-term swap rates can increase quickly in the opposite direction.

“So what does all this mean for property investors looking to arrange finance in the short-term?

“Loans that are floating over BOE base rate or Libor are going to reduce according to markets which are expecting base rates to fall. So, borrowing costs in the short-term look to be reducing for investors adopting a floating strategy. There are a number of lenders who now have a Libor floor for their loans which limits the ability of investors to borrow at pure market rates.

“Long-term fixed rate loans are currently looking extremely cheap, the prospect of fixing a rate for 10 years at under 0.5% in the UK is a unique situation. The challenge is finding a lender who will offer a 10-year loan at a reasonable interest margin. There are lenders out there, typically for loans of £5m+, but the quality of the underlying assets will be a factor.

“Securing a five-year fixed rate is easier with numerous lenders offering these loan durations. However, you need to find a lender who will offer a pure market rate as it is not uncommon for banks to add a premium to the market swap rate in addition to their interest margin.

“Out of all the current market chaos, there is some consolation for property investors that whether they are looking to renew an expiring facility, buy a new asset or release equity from an existing portfolio, borrowing costs look to be reducing.

“If investors can secure a long-term fixed rate which suits their needs then they will probably find that borrowing is currently cheaper than it has ever been.”