Why are mortgage rates climbing when the Bank of England has cut interest rates?

Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in, and we will get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@theipaper.com.

The Bank of England has cut interest rates, but my bank – Santander – appears to be upping mortgage rates. This does not really make sense to me, as I thought the two things were linked. What is the reason?

Answer: At first glance, it feels contradictory. A lower base rate should, in theory, reduce the cost of borrowing.

But fixed-rate mortgages, which make up the majority of mortgages, are not priced directly from the base rate.

They are influenced more heavily by what happens in the financial markets, and one of the most important measures here is the swap rate.

Swap rates are the rates at which banks and other financial institutions agree to exchange fixed and variable interest payments over a set term.

Mortgage lenders use these arrangements to manage the risk of offering fixed-rate loans. If a bank is going to lend you money for, say, five years at a fixed rate, it will often enter into a five-year swap to secure its own funding costs for that period.

Crucially, swap rates move according to market expectations of where interest rates and inflation are heading.

They can rise or fall daily, and sometimes those moves run counter to the Bank of England’s latest decision.

Over the past week, swap rates have edged up because investors have reassessed the outlook for inflation and future rate cuts. Some now believe the Bank may have to be more cautious, with fewer and slower reductions than previously thought.

When swap rates increase, the cost for lenders to fund fixed-rate mortgages rises. That cost is almost always passed on to borrowers in the form of higher rates, regardless of whether the Bank has just cut its base rate.

There is also a practical, business-led reason why lenders adjust rates. If a bank finds itself with more mortgage applications than it can process efficiently – perhaps because it has been offering some of the most competitive deals on the market – it may raise rates to ease the flow.

This is not about the cost of funds, but about managing service levels and meeting internal targets. In Santander’s case, both market conditions and business demand could be in play, as recent competitive pricing has made them a popular choice for borrowers securing a deal in recent weeks.

The Bank of England’s base rate is a familiar headline figure, and it does have a direct impact on tracker mortgages and certain variable rates.

If you are on one of those products, you may see your repayments fall in line with the base rate cut. But for the vast majority of fixed deals, or looking to take one, pricing is shaped by swap markets and lenders’ commercial decisions.

That means mortgage rates can rise even in the same week the base rate falls.
If you are nearing the end of a fixed rate, it is important not to assume that a base rate cut will lead to cheaper mortgage offers straight away.

Rates can move in the opposite direction if swap markets anticipate higher inflation or a slower pace of cuts. For those currently searching for a new deal, the key is to act promptly when you find a rate you are happy with.

Lenders can reprice with very little notice, and in a market driven by narrow margins, that can mean the best deals disappear overnight. A good broker will keep you informed of market movements and may be able to secure a rate before it changes.

Santander’s decision to raise rates this week is not a contradiction of the Bank of England’s move, but a reflection of the way mortgage pricing works in practice. The base rate is an important part of the picture, but it is not the whole story.