Feeling frustrated by the current mortgage market? Got a question about your mortgage that you need answered? Financial experts are regularly on hand to help. In this case, Nick Mendes, mortgage technical manager at John Charcol, responds to a reader who was puzzled by their lender’s recent decision.
The reader’s concern was straightforward: The Bank of England has cut interest rates, but my bank – Santander – is increasing mortgage rates. I thought the two were linked. Why is this happening?
At first glance, this does seem contradictory. A lower base rate should, in theory, make borrowing cheaper. However, fixed-rate mortgages – which make up the bulk of mortgage products in the UK – are not directly tied to the Bank of England base rate.
Instead, fixed-rate deals are more heavily influenced by movements in the financial markets, particularly a measure known as the swap rate. Swap rates are the rates at which financial institutions agree to exchange fixed and variable interest payments for a set period of time.
Lenders use these swaps to protect themselves against interest rate risk when offering fixed-rate loans. For example, if a bank is lending on a five-year fixed rate, it may enter into a five-year swap to secure its own funding costs over that same period.
Swap rates don’t just respond to the Bank of England’s announcements – they also move according to market expectations about future interest rates and inflation. These rates can change daily, and sometimes their movement goes in the opposite direction to the Bank’s most recent decision.
In the past week, swap rates have edged higher as investors reassessed the outlook for inflation and future interest rate cuts. Many now believe the Bank of England may need to be more cautious, with fewer and slower cuts than had been anticipated earlier in the year.
When swap rates increase, it becomes more expensive for lenders to fund fixed-rate mortgages. These extra costs are almost always passed on to borrowers in the form of higher interest rates – even if the base rate has just been reduced.
There is also a more practical, business-related reason why lenders may raise rates. If a bank is receiving more mortgage applications than it can handle – perhaps because it has been offering some of the most competitive deals on the market – it may increase its rates to manage demand and maintain service levels.
This is less about the cost of funding and more about internal capacity. In Santander’s case, it’s likely that both market changes and high levels of demand have contributed to the decision, especially as they have been a popular choice for borrowers recently.
It’s worth noting that the Bank of England’s base rate does have a more direct effect on tracker mortgages and some variable-rate products. Borrowers on these types of deals may see their monthly repayments fall following a base rate cut.
For those on fixed-rate mortgages – or about to take one out – pricing is largely determined by swap markets and lender strategy. This means mortgage rates can still rise even during the same week that the base rate is cut.
If your fixed-rate term is coming to an end, don’t automatically assume that a cut in the base rate will lead to better mortgage deals. Market expectations for inflation and the pace of future cuts can push rates in the opposite direction.
Given how quickly lenders can reprice, it’s wise to act fast when you find a mortgage rate you’re happy with. In today’s competitive market, attractive deals can vanish overnight. Working with a good broker can help you secure a rate before it changes.
Santander’s decision to increase rates this week is not a contradiction of the Bank of England’s action. It’s simply a reflection of how mortgage pricing works in practice. The base rate is an important factor, but it is far from the only one shaping the deals on offer.
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