The Bank of England cut the base rate from 4.50% to 3.75% from 2025-26, that’s a 16.7% reduction. Yet typical five-year fixed mortgage rates only fell 10.3%: from 4.19% to 3.76%. Here’s why.
Why Mortgage Rates Haven’t Fallen – Key Takeaways
- Fixed mortgage rates are determined by swap rates, not the Bank of England base rate
- Base rate fell 0.75 percentage points (16.7%) in 2025, but mortgage rates only fell 0.43 percentage points (10.3%)
- In August 2025, the base rate fell 0.25% but mortgage rates actually increased because swap rates rose
- Swap rates reflect market expectations about future inflation and interest rates over 2-5 years
- Since December 2025, mortgage rates have been stuck at 3.76% because swap rates remain elevated
- Approximately 95% of UK mortgages are fixed-rate products priced using swap rates
- Waiting for base rate cuts to trigger cheaper mortgages is not a reliable strategy
Quick Answer: Why Haven’t Mortgage Rates Fallen More?
Why have mortgage rates only fallen 10.3% when the base rate fell 16.7%? Fixed-rate mortgages are priced using five-year swap rates rather than the Bank of England base rate. Swap rates reflect what it costs lenders to borrow money for fixed periods of 2, 5, or 10 years. Over the past year, whilst the base rate fell from 4.50% to 3.75%, five-year swap rates only fell from 4.15% to 3.99% – a reduction of just 3.9%. Since mortgage rates track swap rates, not base rates, they’ve only fallen by a similar margin (10.3%). In August 2025, this disconnect was particularly clear: the base rate fell 0.25%, but swap rates rose 0.06%, causing mortgage rates to increase despite the base rate cut.
The evidence:
- Base rate fell 0.75 percentage points (16.7%)
- Five-year swap rates fell from 4.15% to 3.99% (just 3.9%)
- Best mortgage rates fell 0.43 percentage points (10.3%)
- August 2025 proof: Base rate fell 0.25%, but swap rates rose 0.06%, so mortgage rates increased
- January 2026: Swap rates rose 3.7% in four weeks despite base rate holding
Key facts:
- Approximately 95% of UK mortgages are fixed-rate products
- Fixed rates are determined by swap rates (the cost of lender funding for fixed periods)
- Swap rates are forward-looking, based on inflation and rate expectations; base rate reflects current policy
- Markets remain cautious about future inflation despite base rate cuts
- Mortgage rates have been stuck around 3.76% since December 2025
What Everyone Assumes About Mortgage Rates
Most people believe the relationship is straightforward: when the Bank of England cuts the base rate, mortgage rates fall. When it raises the base rate, mortgage rates rise.
This assumption makes intuitive sense. The base rate receives significant media coverage, with every Monetary Policy Committee decision analysed in detail. Commentary invariably focuses on what the change means for “borrowers and savers,” reinforcing the idea that it directly determines borrowing costs.
For those with fixed-rate mortgages (or those looking to arrange one) the base rate has surprisingly little direct impact on the rate they’ll actually pay. Given that approximately 95% of new mortgages in the UK are now fixed-rate products, this represents a significant gap in public understanding.
What the Base Rate Actually Affects
The Bank of England base rate is the interest rate charged to commercial banks for overnight borrowing. It serves as a baseline that influences lending costs throughout the economy.
The base rate does have an immediate impact on certain financial products:
- Savings accounts respond relatively quickly to base rate changes, with rates typically rising when the base rate increases and falling when it decreases.
- Credit cards and personal loans often track the base rate, meaning borrowing costs move broadly in line with it.
- Variable rate mortgages are directly affected. Tracker mortgages (base rate plus a fixed percentage) move in precise tandem with base rate changes. Standard Variable Rates (SVR) typically follow base rate movements, though lenders aren’t obliged to pass on changes in full or immediately. Discount mortgages, being discounts off the SVR, are indirectly affected.
These products are designed to be variable, with rates that can change at any time in response to base rate movements.
Fixed-rate mortgages work on an entirely different principle. When you fix your rate for two, five, or ten years, you’re locking in a rate that won’t change regardless of subsequent Bank of England decisions. The question, then, is how lenders determine what that fixed rate should be in the first place.
Swap Rates: The Actual Driver of Fixed Mortgage Pricing
Fixed mortgage rates are determined by swap rates, not the base rate.
When a lender offers a five-year fixed mortgage at 3.76%, they’re making a commitment that the rate won’t change for five years regardless of what happens to interest rates during that period. To honour that commitment, they need to secure their own funding for the entire five-year term at a known cost.
Lenders use the swap market to achieve this. They lock in their borrowing costs for the fixed period by using interest rate swaps (financial instruments traded on markets daily). The five-year swap rate becomes the benchmark cost for funding five-year fixed mortgages. The two-year swap rate determines two-year fixed mortgage pricing, and so on.
These swap rates fluctuate based on market expectations about future economic conditions:
- Anticipated inflation over the fixed period
- Predictions about future interest rate movements
- Economic growth forecasts
- Global market conditions and investor sentiment
Here’s a helpful comparison: Crude oil prices might fall 10%, but petrol prices at the forecourt don’t immediately drop by the same amount. Refining costs, transportation, taxation, and retailer margins all sit between crude oil and pump prices. The connection exists, but it’s neither direct nor instantaneous.
Similarly, whilst base rates and swap rates are related (both reflect interest rate conditions) they respond to different factors and move on different timescales. Swap rates are forward-looking, based on where markets expect rates to be over the coming years. The base rate reflects current monetary policy decisions.
Why Base Rates and Swap Rates Move Differently
Here’s an example that illustrates the disconnect.
On 7th August 2025, the Bank of England cut the base rate from 4.25% to 4.00%, that’s a 0.25 percentage point reduction. Borrowers expected mortgage rates to fall.
But look at what actually happened to five-year swap rates, the cost for lenders to fund five-year fixed mortgages:
- Early August 2025: 3.96%
- End of August 2025: 4.02%
Swap rates actually rose by 0.06 percentage points during the same month the base rate fell by 0.25 percentage points.
Why? Markets became concerned about inflation persistence. Wage growth remained strong, services inflation stayed elevated, and traders worried the Bank might need to pause or even reverse rate cuts. Global oil prices had also ticked up, adding to inflation fears.
The result? Despite the base rate falling, typical five-year fixed mortgage rates actually increased that month, from 3.89% to 3.90%.
This isn’t a theoretical example, it’s what actually happened in the market. Lenders can’t offer cheaper five-year fixed mortgages when their cost of funding those mortgages has gone up, regardless of what the Bank of England did with the base rate.
This can work in the opposite direction. The base rate might remain unchanged or even rise slightly, but if swap rates fall because markets expect significant cuts ahead, mortgage rates can improve. This scenario receives less media attention because it doesn’t fit the simple narrative of base rate movements dictating borrowing costs.
The Three Rates Compared: Feb 2025 – Feb 2026
Base rate reduction: -0.75% (16.7% decrease)
Swap rate reduction: -0.16% (3.9% decrease)
Mortgage rate reduction: -0.43% (10.3% decrease)
*Best buy 5-year fixed rate, 60% LTV (40% deposit), £999 fee. Rates vary by deposit size, product, and individual circumstances.
Sources: Bank of England; Investing.com (GBP 5yr IRS); NM Finance best buy data.
The pattern is clear: mortgage rates track swap rates almost exactly, not the base rate. When swap rates rose in August despite base rate cuts, mortgage rates rose too. When swap rates have been elevated in January, mortgage rates have stayed flat.
Why Mortgage Rates Have Been Stuck
Since December 2025, mortgage rates have remained essentially flat around 3.76% despite the base rate holding at 3.75%. Many borrowers expected further falls into 2026.
The reason lies in swap rate movements. Whilst the base rate has stayed put, five-year swap rates have actually been rising:
- 4th January 2026: 3.85%
- 1st February 2026: 3.99%
That’s a 3.7% increase in just four weeks. Markets are pricing in several concerns:
- Uncertainty about whether inflation is truly under control
- Global economic volatility, particularly around trade policies
- Questions about whether 3.75% is the “neutral” base rate or whether cuts might resume later in the year
- Government fiscal policy and its impact on inflation expectations
With swap rates rising in early 2026, there’s no scope for mortgage rates to fall. In fact, if swap rates continue climbing, we could see mortgage rates increase despite the base rate remaining on hold.
This is why waiting for “rates to definitely come down” has proved frustrating for many borrowers throughout 2025 and into 2026.
What This Means for Your Mortgage Decisions
The practical consequence is clear: waiting for base rate cuts to trigger cheaper mortgages is not a reliable strategy. Mortgage rates might fall following a base rate cut, but they also might not, as August 2025 definitively proved.
The assumption that base rate reductions automatically translate into lower mortgage rates leads some borrowers to delay decisions. They wait for rates to “definitely” come down, only to find that when they return to the market weeks or months later, rates have actually increased or remained stubbornly flat.
Timing the mortgage market with precision is effectively impossible. Professional traders with sophisticated tools and full-time market access regularly get rate movements wrong. What borrowers can do is make informed decisions based on current circumstances rather than speculation about future rate movements.
For those about to remortgage – approaching the end of a fixed term within the next six to twelve months, securing a new rate is generally advisable. Most lenders allow rates to be locked in up to six months before the current deal ends. Whilst there’s always a possibility that rates could fall before completion, there’s an equal possibility they could rise, as January 2026’s swap rate movements demonstrate.
What This Disconnect Means in Pounds
For a £300,000 mortgage over 5 years, the gap between what borrowers expected and what they’re actually paying is significant:
If mortgage rates had fallen proportionally to base rate cuts:
- Expected rate: 3.61% (16.7% reduction from Feb 2025’s 4.19%)
- Monthly payment: approximately £1,643
- Total paid over 5 years: approximately £98,580
Actual best rate in February 2026:
- Actual rate: 3.76%
- Monthly payment: approximately £1,667
- Total paid over 5 years: approximately £100,020
The difference: £1,440 more paid over 5 years because mortgage rates didn’t fall in line with base rate cuts.
This illustrates why understanding the swap rate and base rate disconnect matters for your actual finances, not just in theory. For borrowers who delayed their remortgage throughout 2025 waiting for rates to fall further, the cost has been real.
Variable Rate Mortgages and the Base Rate
For borrowers on variable rate products, the base rate does matter directly.
Tracker mortgages (where the rate is explicitly set as base rate plus a fixed percentage) move in precise alignment with base rate changes. A base rate cut of 0.25% translates directly into a 0.25% reduction in the mortgage rate.
Standard Variable Rates typically follow base rate movements, though lenders retain discretion over the extent and timing of changes.
Discount mortgages offer a set discount from the lender’s SVR and are therefore indirectly affected by base rate movements.
Variable rate borrowers should see payment reductions when the base rate falls. However, most borrowers have moved away from these products precisely because they offer no protection against rate increases. Between 2021 and 2023, the base rate rose from 0.1% to 5.25%. Variable rate borrowers saw dramatic increases in monthly payments, whilst those who had fixed at 1.5% or 2% in 2020 or early 2021 remained entirely protected.
The preference for fixed rates reflects a desire for certainty and budgeting stability. But that certainty comes with a trade-off: rates are determined by swap rates rather than the base rate that dominates financial news.
What Borrowers Need to Understand
Becoming an expert in swap rate movements or financial market mechanics isn’t necessary. Nobody needs to track crude oil prices to understand petrol costs, they simply need to know the price when they fill the tank.
The essential understanding required is straightforward:
Base rate headlines don’t tell the complete story about mortgage rate movements. Fixed-rate mortgages are priced using swap rates, which respond to different factors and move independently. This is why mortgage rates don’t always follow base rate changes in the direction or magnitude that news coverage might suggest.
Making financial decisions based on assumptions drawn from base rate headlines can lead to missed opportunities or unexpected costs. Professional mortgage advice exists specifically to monitor the factors that actually determine available rates and to advise on optimal timing based on individual circumstances.
At NM Finance, we monitor swap rates and lender pricing changes daily. We track funding cost movements and their implications for the rates available to clients. When we advise that it’s a good time to secure a rate, or suggest having a conversation about a remortgage well before it’s technically due, that advice is based on actual market movements rather than headline news.
Frequently Asked Questions
Q: The base rate has fallen 0.75% in the past year, so why have mortgage rates only fallen 0.43%?
A: Because fixed mortgage rates are determined by swap rates, not the base rate. Swap rates reflect what it costs lenders to secure funding for 2, 5, or 10-year periods, and these costs have only fallen 0.16% (from 4.15% to 3.99%).
Throughout 2025, financial markets remained concerned about whether inflation was truly under control, particularly services inflation. Even when the base rate fell 0.25% in August 2025, swap rates actually rose that month because markets were pricing in inflation risks that the Bank of England’s base rate decision didn’t fully reflect.
Q: Why have mortgage rates been flat since December despite base rate changes?
A: Swap rates have been volatile since late 2025. Whilst the base rate has held at 3.75%, five-year swap rates actually rose from 3.85% in early January to 3.99% by early February, that’s a 3.7% increase in four weeks. Markets appear to believe 3.75% may be close to the “neutral” rate where rates neither stimulate nor restrict the economy. With inflation still above the 2% target and economic uncertainty persisting, swap rates haven’t fallen further, keeping mortgage rates stuck around 3.76%.
Q: What’s the difference between base rate and swap rates?
A: The base rate is the Bank of England’s current interest rate for overnight lending between banks. Swap rates are the cost for lenders to borrow money for fixed periods (2, 5, or 10 years). Lenders use swap rates to price fixed mortgages because they need to lock in their own funding costs for the entire mortgage term. Swap rates are forward-looking and based on inflation and rate expectations; the base rate reflects current policy decisions.
Q: Do any mortgages follow the base rate directly?
A: Yes. Variable rate mortgages including tracker mortgages (base rate plus a fixed percentage), Standard Variable Rates (SVR), and discount mortgages move in line with base rate changes. However, approximately 95% of new UK mortgages are fixed-rate products, which are priced using swap rates instead.
Q: When should I remortgage if rates aren’t falling as expected?
A: If your fixed term ends within 6-12 months, it’s advisable to review options now rather than waiting for rates that may never materialise. You can typically lock in rates up to 6 months in advance. Given swap rate volatility in 2026, securing certainty at current rates often proves more cost-effective than speculation. The August 2025 example shows rates can rise even when the base rate falls.
Q: Where can I find current swap rates?
A: Swap rates are published on financial platforms like Investing.com (search for “GBP 5 Year IRS”) and Bloomberg, but they require interpretation and context. Most borrowers benefit from working with a mortgage broker who monitors swap rates daily alongside lender pricing changes and can advise when market conditions become favourable for your specific circumstances.
The Bottom Line
The way mortgage rates and base rates are reported in mainstream media creates an understandable misconception that they’re essentially the same thing. For variable rate products, that’s largely accurate. For fixed-rate mortgages which now dominate the market, it’s fundamentally incorrect.
Base rate announcements will continue to make headlines and receive detailed analysis. Borrowers will continue to assume their mortgage rate should move in line with those announcements. But understanding the distinction between base rates and the swap rates that actually determine fixed mortgage pricing provides a more accurate picture of how borrowing costs are determined.
Over the past year, the evidence is clear: the base rate fell 16.7%, swap rates fell just 3.9%, and mortgage rates fell 10.3%. In August 2025, the base rate fell but mortgage rates rose because swap rates increased. In January 2026, mortgage rates stayed flat because swap rates rose despite the base rate holding.
This understanding is particularly important when making decisions about when to arrange or remortgage a property. Delaying a decision in the expectation that base rate cuts will definitely produce better mortgage rates is a gamble that frequently doesn’t pay off, as thousands of borrowers discovered throughout 2025.
If you’re approaching the end of a fixed-rate term, or considering a property purchase or refinance, decisions should be based on currently available rates and individual circumstances rather than speculation about future rate movements driven by base rate predictions.
The mortgage market involves multiple moving parts that don’t always move in intuitive ways. Understanding what actually drives the rates you’re offered, rather than what the headlines suggest should be driving them, is the foundation of sound property finance decisions.
Have Questions About Your Mortgage?
If you’re approaching the end of your fixed term in the next 6-12 months, or need clarity on current rate movements and their implications for your situation, we can help.
We monitor swap rates and lender pricing daily and can explain what’s actually happening with mortgage pricing rather than what headlines suggest should be happening.
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