Why Are Lenders Increasing Fixed Mortgage Rates — Even After a Base Rate Cut?
You might expect that when the Bank of England cuts the base rate, mortgage costs fall across the board. But right now many borrowers are seeing fixed mortgage rates rise, or fail to drop as quickly as hoped. Here’s why.
Fixed Mortgage Pricing Is Driven by Swap Rates, Not Just Base Rate
When lenders price fixed-rate deals, they don’t simply base them on the Bank of England’s base rate. A critical input is the cost at which banks can secure funding in the financial markets — in particular swap rates, which reflect expectations of future interest rates over the term of the mortgage.
Even after the base rate cut- Swap rates have remained elevated or even increased in recent months, as markets reassess inflation, rate expectations and economic uncertainty. Lenders pass these higher funding costs on to customers through higher fixed rates. In other words, mortgage pricing reflects what lenders expect rates to be over the fixed term, rather than the current base rate alone.
Market Expectations for Future Base Rates Are Uncertain
Although the Bank of England has started cutting the base rate, markets still price in uncertainty over how far and how fast rates will fall. Analysts and investors may believe that fewer or slower cuts will come than previously expected.
That pushes up swap and gilt yields - and lenders respond by holding fixed mortgage rates higher to protect margins.
This dynamic explains why, in some recent weeks, average fixed mortgage pricing has crept up even though the base rate is lower.
Lenders Are Managing Risk Post-Rate Peak
After a prolonged period of high interest rates- Many lenders are recalibrating how they price risk, particularly for longer fixed terms.
Higher costs of funding, profit margin considerations and capital constraints all feed into pricing decisions.
This risk-aware approach means lenders may tread carefully, keeping fixed rates higher rather than cutting aggressively, even if base rates are moving down.
Competition Isn’t Uniform Across the Market
Not every lender reacts the same way- Some banks might aggressively price products to gain market share. Others may hold back, widen pricing and wait for clearer signals on inflation or economic data. The result is a mixed marketplace - where some fixed rates fall, others rise, and overall averages can trend up even in a cutting cycle.
Higher House Prices and Affordability Pressures Still at Play
While the base rate affects borrowing costs, other factors also influence mortgage pricing:
UK home prices have recently passed key milestones, indicating sustained demand and potentially greater risk for lenders.
Lenders remain focused on affordability calculations, loan-to-value ratios and credit risk - all of which feed into how fixed deals are priced. These ongoing pressures can counteract the expected downward movement in mortgage pricing.
So What Should Borrowers Take Away?
- Don’t assume base rate cuts mean automatic lower fixed rates. Pricing is shaped by market funding costs, risk expectations and lender strategy.
- Watch swap rates and market expectations, as these more closely drive fixed mortgage pricing than the base rate itself.
- Act sooner rather than later if you see a good fixed deal - waiting for even lower rates could backfire if market pricing shifts.
- Talk to a broker to understand how these dynamics affect your specific circumstances - a small difference in rate can have a big impact on monthly payments and total interest over the mortgage term.
