Why mortgage rates don’t always drop when the base rate does?

The Bank of England’s Monetary Policy Committee (MPC) is the group responsible for setting the bank base rate (BBR). This interest rate influences the cost of borrowing for banks and the rates they offer on loans, mortgages and savings, all with the ultimate aim of helping to control inflation.

When the committee meets roughly every six weeks, all eyes are on its decision. Based on many factors in the UK economy and abroad, the MPC will decide whether to raise, hold or cut the base rate.

You may expect a cut to the base rate to mean an instant cut to mortgage rates - however, this isn’t always the case. The base rate is just one component that influences the mortgage rates offered by a lender.

Swap rates

Another factor is something called swap rates – the rate lenders pay to access money to lend. Think of these like the stock exchange - they fluctuate all the time depending on economic conditions, global factors, market expectations and sentiment. If swap rates increase, then so does the cost for lenders to lend money.

When the economy is stable and inflation is on track, a decision to cut the base rate can cause swap rates to fall and almost instantly bring mortgage rates down. However, if swap rates become unsettled by economic events, future expectations for inflation or challenges abroad, a cut to the base rate may not be enough to calm swap rates, causing the cost for lenders to borrow money to increase.

We have seen this recently following the Chancellor’s Budget. The big policy announcements made by the Chancellor, along with concerns in the Middle East and uncertainty around the implications of the US Presidential race, unsettled swap rates and caused them to rise. Even with the positive news from the MPC to cut the base rate, it wasn’t enough to stop fixed rate mortgages increasing.

What about trackers or SVR?

It’s important to note that this swap rates something that mainly impacts fixed rate mortgages. A cut to the base rate will be felt almost immediately by those who are on a tracker mortgage – a flexible rate that follows the bank base rate – or if you are on a lender’s standard variable rate (SVR) – a changeable rate set by the lender typically after your fixed rate comes to an end.

This is only a minority of borrowers though, as according to UK Finance, 74% of homeowner mortgages are on a fixed rate contract, with 94% of new borrowers choosing this since 2019.

Supply and demand

Alongside swap rates, supply and demand is another factor that can cause mortgage rates not to drop if the base rate is cut. It may seem advantageous for one lender to offer a lower rate than their competition. However, if a rate is too competitive following a rise in swap rates, they may become overrun with new business enquiries and unable to cope with the demand.

In this instance, we may see some lenders decide to follow the herd and reprice their products, bringing them closer in line with their competition.

Separately, it is important to note that lenders have many internal factors that will decide whether they raise or reduce mortgage rates. This can include their own lending targets and future pipeline, competitor pricing and overall service levels, irrespective of swap rates or the bank base rate.

Get advice today

Understanding the factors that can contribute to mortgage pricing can be important in helping you make the right decision. While this can be confusing, with lots of factors contributing to the rates on offer, mortgage and protection advisers can offer plenty of knowledge, support and access to lots of lenders for those looking to navigate the market.

Whether you’re looking to apply for a mortgage, you are soon due to remortgage or you are just looking for some advice, we can help you find the right solution.

To book your appointment, please call Ryan or Joe on 01227 375500 or email at admin@oysterfinancialsolutions.co.uk.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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