The swap rate

The term “swap” or “swap rate” is used in connection with mortgages, especially fixed-rate ones. This is the interest rate swap (IRS) in Swiss francs for various terms (usually 1 to 30 years). The swap rate reflects the refinancing rate for banks on the international capital markets.

Typically, a financial institution finances a mortgage with the credit balances in its savers’ accounts. However, it can also do this on the international capital market, in which case it will refinance through a counterparty.

When a mortgage specialist talks about the swap rate, they are therefore referring to the interest costs of a mortgage on the provider’s side. The financial institution’s individual margin is added to the swap rate, giving the mortgage rate for the property buyer.

This makes the swap rate a great way of hiding the lender’s own pricing policy and monitoring the interest rate trend in isolation.

It is called a “swap” because contracting parties A and B are “swapping” interest for the agreed term – at a cost. Contracting party A pays a fixed interest rate to contracting party B but receives the current money market rate (SARON, previously LIBOR) in return. If the money market interest rate is below the agreed rate, contracting party A pays the difference; if it is above, A receives the difference from B.