Why mortgage rates can move differently from the Bank of England base rate

How mortgage rates are set – and why they don’t always follow the Bank of England base rate

The Bank of England’s base rate often makes headlines, and many assume that when it changes, mortgage rates will immediately follow suit. But in reality, that’s not always the case—especially for fixed mortgage rates.

While the base rate plays a role in influencing mortgage rates, lenders set their own rates based on multiple factors, including swap rates (the interest banks charge each other), inflation, competition, and broader economic trends. This means that if the BoE base rate rises by 1%, mortgage rates won’t necessarily increase by the same amount—or at the same time.

Beyond that, different types of mortgages react differently to interest rate changes, so understanding these differences can help borrowers make informed decisions.

How rate changes affect different types of mortgages

Fixed-rate mortgages

A fixed-rate mortgage locks in an interest rate for a set period—typically two, three, or five years—providing stability in monthly repayments. This means borrowers are protected if interest rates rise but won’t benefit if rates fall until their fixed term ends.

It’s also important to note that exiting a fixed-rate deal early usually incurs an early repayment charge (ERC), which is typically higher for longer fixed periods. For example, leaving a five-year deal early could be much more costly than leaving a two-year deal.

Tracker mortgages

Tracker mortgages are more directly tied to the Bank of England base rate. If the base rate rises or falls, a tracker mortgage will follow suit, usually from the next month. This means changes in repayments can be quick and sometimes significant—offering opportunities when rates fall but increasing costs when they rise.

Standard variable rate (SVR) mortgages

When a fixed or tracker mortgage deal ends, borrowers who don’t remortgage typically move onto their lender’s SVR. These rates are set at the lender’s discretion and are often significantly higher than fixed or tracker rates. That’s why SVRs are sometimes referred to as a “tax on inaction”—similar to overpaying for car insurance by not shopping around when your renewal comes up.

Why fixed mortgage rates don’t always change immediately with the BoE base rate

Fixed mortgage rates don’t automatically track the BoE base rate because they’re influenced by a broader range of economic factors. Key influences include:

1. Market expectations

Lenders set fixed mortgage rates based on where they believe interest rates are heading. If markets expect rates to rise, lenders may increase fixed rates pre-emptively. Conversely, if rates are expected to fall, lenders may lower fixed rates ahead of an official BoE decision.

2. Inflation and economic conditions

High inflation tends to push interest rates up, leading to higher mortgage rates. If inflation cools, lenders may lower fixed rates—even if the BoE base rate stays the same.

3. Swap rates and bond markets

Lenders look at swap rates (the cost of borrowing between banks) and government bond yields when setting fixed mortgage rates. When swap rates or bond yields rise, fixed mortgage rates tend to follow. If they fall, mortgage rates may come down too.

4. Lender strategy and competition

Different lenders have different business strategies. Some absorb short-term cost increases to remain competitive, while others raise rates more quickly. Competition in the market also plays a role—if one lender cuts rates, others may follow to attract borrowers.

5. The yield curve and long-term interest rates

The yield curve, which reflects interest rates over different time periods, can also influence mortgage rates. If long-term rates are expected to rise, lenders may price longer-term fixed mortgages higher to offset potential risks.

Why mortgage rates don’t always adjust immediately when the BoE base rate changes

Because fixed mortgage rates depend on a mix of economic factors, they don’t always shift in direct response to the BoE base rate. Lenders often wait to assess economic trends before adjusting their rates.

For instance, ahead of the most recent base rate cut, some lenders had already reduced their mortgage rates in anticipation. In contrast, others held off because they were confident that strong demand—partly fuelled by upcoming stamp duty changes—would keep business steady without immediate rate cuts. Once that demand slows, we might see mortgage rates fall more quickly.

Key takeaways

While the BoE base rate is an important influence, it’s not the sole driver of mortgage rates. Borrowers should consider not just where interest rates are today but where they might be heading—and how different mortgage types react to changes. Shopping around and understanding the market can make a big difference in securing the best deal.