If the fed interest rate is 3.75-4%, why is the average mortgage rate above 7% and most savings accounts are below 3%?
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Oh god, sorry if this gets over-complicated but it’s a rabbit-warren of strange terms not in use by your average person.
Your mortgage lender lends you 100k at 1% for 10 years. To hedge their risk of rate changes meaning they might not make as much money (in their eyes, lose money), they go out to wholesale and do a swap with someone where they agree a notional amount (100k in this case) over a term (10 years) where they pay 0.5% and receive a variable rate.
So mortgage fixed rates are based on what the lender can get in the wholesale market on a swap or swaps used to hedge their lending.
Swap pricing is only tangentially related to central bank rates tbh. There’s a whole other load of gubbins parties use to build their swap curves. But they *generally* follow the same trends.
Also, I’ve only experience of UK based wholesale stuff, your extra-uk stuff mileage may vary. A 10 year fixed rate on a mortgage in the UK is very rare, people and lenders mostly do 2-5 year fixed rates.
Edit/balls forgot to add, savings fixed rate accounts follow the same method but obviously the hedging is inverted, meaning you swap to pay a variable rate and receive a fixed rate.
So the wholesale market is based on where people think swap curves are going to look like X years down the line, and therefore what they’ll offer/accept on the fixed leg.
Example, in the UK under the last prime minister, she and her chancellor decided to do some things, and the wholesale swap market went bonkers: no-one had any idea about how to price swaps. So a lot of UK lenders immediately pulled all their fixed rate mortgages from the market, because they just couldn’t hedge them.
There’s also net interest margin to spraff on about, which is the difference between interest received Vs what you’re paying…. It all gets incredibly complex very quickly.
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