Understanding rates
Why fixed rates can rise even when the base rate hasn’t moved, and how monitoring swap rates helps us advise on timing.
Interest rate swaps are financial contracts used by lenders to manage interest rate risk. When a lender offers you a five year fixed rate mortgage, they are effectively committing to a fixed interest income for five years. But their own funding costs are typically variable. To protect against this mismatch, lenders enter into interest rate swaps with financial institutions, agreeing to exchange their variable rate exposure for a fixed rate payment over the same period.
The cost of these swap contracts, the “swap rate”, directly determines how cheaply (or expensively) the lender can offer a fixed rate product. The rate is set by financial markets, reflecting market expectations of future interest rates over the relevant period (two year, five year, ten year, etc.).
Swap rates are the primary driver of fixed mortgage rate pricing, more so than the base rate. The cost of a fixed mortgage is essentially: swap rate + lender margin (to cover costs and profit).
When swap rates rise, lenders increase their fixed rates within days or even hours. When swap rates fall, competitive lenders typically reduce fixed rates fairly quickly, though they may be slower to pass reductions on than increases.
This is why you sometimes see fixed rates rising sharply while the base rate hasn’t moved, as happened dramatically in autumn 2022 when swap rates spiked following the UK Government’s “mini budget”, causing fixed rates to jump by over 2% in a matter of weeks.
The base rate and swap rates are related but can move independently. Understanding the difference is important:
| Feature | Base Rate | Swap Rates |
|---|---|---|
| Set by | Bank of England MPC | Financial markets (constantly changing) |
| How often it changes | ~8 times per year, at MPC meetings | Continuously, in real time |
| Affects | Tracker mortgages and SVRs directly | Fixed rate mortgages primarily |
| Forward looking? | No, reflects current policy | Yes, prices in expectations of future rates |
| Can diverge? | Yes, swap rates can rise even when base rate is held (if markets expect future rate rises) | |
Because swap rates are forward looking, they can move in anticipation of what the MPC is expected to do, meaning fixed mortgage rates sometimes reprice before any official base rate change.
For borrowers considering or reviewing a fixed rate mortgage, swap rate movements matter:
If swap rates are falling or expected to fall, waiting a short period before fixing can secure a better rate. If they’re rising, acting quickly to secure a rate may be wise, lenders can withdraw and reprice products with very little notice.
Most mortgage offers are valid for 3-6 months. Applying for a mortgage offer early, even months before you need it, can lock in today’s rate if swap rates are expected to rise.
If your fixed rate is expiring in the next six months, monitoring swap rates can influence whether to lock in a new deal now or wait. Most lenders allow you to secure a rate months in advance of your current deal ending.
If swap rates are high, a product transfer with your existing lender (often quicker and without legal fees) may be preferable to a full market switch, at least until rates improve.
Monitoring swap rates and understanding their trajectory is something we do as a matter of course for all our clients. If you’re approaching the end of a fixed deal, or considering a new purchase, we can advise on whether it makes sense to act now or wait, and we’ll tell you why, not just what.
We can also alert you when rates change significantly, so you’re never caught off guard by a market move.
Book a free rate review callWe monitor swap rates and advise clients on timing as part of our free service. Book a call to discuss your situation.
Book your free callYou may have to pay an early repayment charge to your existing lender if you remortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.