What is the Difference Between Swap Rates, the Bank of England Base Rate, and Mortgage Interest Rates?

When it comes to choosing a mortgage, there are a lot of terms thrown around that can feel confusing at first glance. Among the most common are swap rates, the Bank of England base rate, and mortgage interest rates. Each of these plays a crucial role in how lenders decide what interest rate you will pay on your mortgage, but they are not the same thing.

So, what is the difference, and why should you care?

What is the Bank of England Base Rate?

The Bank of England base rate is the official interest rate set by the Bank of England’s Monetary Policy Committee. It is essentially the rate at which the Bank lends money to commercial banks. When the base rate changes, it influences the cost of borrowing and saving across the entire economy.

If the base rate rises, it typically becomes more expensive to borrow money, which can lead to higher mortgage repayments. Conversely, if the base rate falls, borrowing may become cheaper. Many tracker mortgages and standard variable rate mortgages are directly linked to the base rate, so any change is likely to affect what you pay almost immediately.

What Are SWAP Rates?

SWAP rates are used in financial markets to indicate the expected path of interest rates over a fixed period. They are not set by a central authority like the Bank of England but are driven by supply and demand in the financial markets.

When lenders price fixed-rate mortgages, they use swap rates as a benchmark because fixed-rate mortgages are essentially a bet on where interest rates will go in the future. If SWAP rates rise, it usually means markets expect interest rates to go up, so lenders will price new fixed-rate mortgages higher. If SWAP rates fall, fixed-rate mortgages could become cheaper.

Think of SWAP rates as the market’s forecast of the future cost of money over a defined period.

What Are Mortgage Interest Rates?

The mortgage interest rate is the actual rate you will be charged on your loan. This can be fixed for a period or it can vary, depending on your mortgage deal. Lenders set this rate based on a combination of factors, including:

• The Bank of England base rate
• Current SWAP rates
• Their own funding costs
• The level of competition in the market
• Your credit profile and the amount of deposit or equity you have

While the base rate and SWAP rates help shape the overall environment, lenders still make their own decisions on the rates they offer to customers.

Why This Matters

Understanding how these elements interact can help you make better decisions about your mortgage. For instance, if SWAP rates are rising, it might suggest fixed mortgage rates could go up soon, which might influence the timing of your application or your preference for taking the insurance provided by a fixed rate to protect against future rises over say, the next five years. If the Bank of England is expected to raise its base rate, variable rate deals could also become more expensive.

By keeping an eye on all three, the base rate, SWAP rates, and mortgage interest rates, you can paint a clearer picture of where the market is heading and, together with the advice of an expert, ascertain the right time for you to secure a new deal.