Why a Bank of England Base Rate Change Doesn’t Always Affect Your Mortgage Rate
When the Bank of England (BoE) changes its base interest rate, it often makes headlines, and you might expect your mortgage rate to change right away. But the truth is, not all lenders pass on those changes immediately or in full. Here’s why a base rate rise or cut doesn’t always mean your mortgage payments will move straight away.
How Do Lenders Get the Money They Lend?
Lenders don’t simply borrow money from the Bank of England at the base rate and lend it to you. Instead, they raise funds in different ways, such as:
- Borrowing from Investors: Many lenders raise money by borrowing from investors or other financial institutions. The cost of this borrowing depends on the market, the lender’s credit rating, and other factors, not just the base rate.
- Using Customer Savings: Some lenders use money from customer savings accounts. The interest they pay on these savings doesn’t always change immediately with the base rate.
- Their Own Capital: Bigger banks might use their own money or profits to lend.
One key part of this borrowing cost is something called the swap rate. Swap rates are financial market rates that lenders use as a benchmark for longer-term borrowing costs. They reflect what it costs lenders to borrow money over a period of time, and they move based on market conditions, including but not limited to changes in the Bank of England base rate.
What Are Swap Rates and Why Do They Matter?
Swap rates are like a “hidden” interest rate that lenders watch closely. When swap rates rise, it becomes more expensive for lenders to borrow money long-term. Even if the Bank of England base rate stays the same, rising swap rates can push lenders to increase mortgage rates.
Conversely, if swap rates fall, lenders may be able to offer lower mortgage rates – even if the base rate hasn’t changed.
Because swap rates are influenced by wider market factors (such as inflation expectations and global economic events), mortgage rates can sometimes move independently of the Bank of England base rate.
What This Means for Your Mortgage
When the base rate changes, lenders think about how it affects their costs before deciding whether to change their mortgage rates. Here’s what you need to know:
- Fixed-Rate Mortgages: If you have a fixed-rate mortgage, your rate is set for a certain period (like two or five years) and won’t change until that term ends. So even if the base rate goes up or down, your payments stay the same during the fixed period.
- Tracker Mortgages: Tracker rates are directly linked to the Bank of England base rate plus a small margin. When the base rate changes, tracker rates usually change too, which means your payments can go up or down fairly quickly.
What Should You Keep in Mind?
- Your Rate May Not Change Immediately: If you’re applying for a mortgage or remortgaging, the rate offered to you might not change right away after a base rate move. Lenders often lock in rates during the process.
- Know Your Mortgage Type: Fixed-rate deals won’t react to base rate changes until the fixed term ends. Tracker mortgages will move more closely with the base rate.
- Interest Rate Changes Are Complex: The relationship between the Bank of England base rate and your mortgage is not always direct or immediate because lenders have different ways of funding their loans.
So in summary: The Bank of England base rate is important, but it’s only one part of the puzzle. Because lenders raise money in different ways and because of factors like swap rates, mortgage rates don’t always change immediately or exactly when the base rate moves.
If you want to understand how your mortgage could be affected, get in touch. We’re here to help you navigate the market with confidence.