Why mortgage rates are rising despite an unchanged Bank of England base rate

On 16 January the average rate on a new two‑year fixed mortgage was 4.78%; two months later it was 5.20%, even though the Bank of England held the base rate at 3.75%. US and Israeli airstrikes on Iran and the ensuing conflict have rocked markets: stock indices fell, petrol and heating oil prices rose and forecasters warned of higher bills for food and holidays.

Those shifts feed into expectations for interest rates and, from there, into mortgage pricing. Most UK mortgages are offered on a fixed rate for two, three or five years and are funded by a mix of lenders’ deposits and money borrowed in wholesale markets. Banks use interest‑rate swaps to manage the risk of funding loans: one party pays a fixed rate and the other a floating rate, allowing a lender to lock in a predictable cost even if base rates move.

The source gives an example of a lender charging 4.75% on a £100,000 loan while borrowing at a rate tied to the base rate, then swapping the variable exposure for a fixed rate to protect profit.

United Kingdom

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