Written by: Danny Belton - Head of Lending
The UK base rate has an impact on interest rates across the country and affects mortgages, credit cards, and savings rates. That being said, swap rates can have more of an effect on fixed mortgage rates than the Bank of England base rate does.
What is the current base rate in the UK?
The current UK base rate is 5%, as of August 2024. This drop is a positive sign for the market, and we may see lenders dropping rates over the next few months to match. Inflation is holding steady and more cuts are potentially on the horizon, but savers will still likely benefit from good interest rates. Prior to this, the UK saw the Bank of England hold the base rate at 5.25% for close to a full year.
How does the base rate work?
The base rate is set by the BoE1 and determines the interest rate they charge commercial banks and building societies for loans. Because of this, it influences the interest rates that lenders charge for mortgages and loans, as well as other types of credit.
The BoE changes the base rate as a way of influencing the UK economy. If rates are lower, they may want to see more spending across the country. If rates are higher, the cost-of-living rises and consumers are encouraged to focus their efforts on saving money.
The BoE reviews the base rate eight times each year - or every six weeks.
What is a swap rate?
As we know, banks lend money to customers but they will also borrow from other financial institutions themselves. Swap rates are when the lender and financial institution swap a variable and fixed-rate with each other. The lender, typically a bank or building society, will typically offer a variable rate, whereas the financial institution will offer a fixed-rate. This is beneficial for the lender as it allows them to offer their customers the stability of a fixed interest mortgage rate. By doing this, lenders are able to use swap rates to lock in funding for a fixed period of time, such as three, five or ten years.
A swap rate is a separate interest rate used predominantly by banks and lenders. Though banks lend money, they sometimes need to borrow it themselves. Swap rates are the interest banks use to swap fixed interest payments for variable ones, or vice versa. They do this to hedge against future risks, such as interest rates increasing. This rate is set by the Sterling Overnight Index Average (SONIA).
These rates are influenced by what the market thinks future interest rates will be. So, if people expect rates to rise, swap rates tend to increase. Because of this, when swap rates go up, so do mortgage rates and other loans.
Ben Thompson, Deputy CEO at Mortgage Advice Bureau comments on the base rate announcement, saying: “This decision could’ve gone either way, but the Bank of England has rolled the dice and now finally has sufficient confidence to cut rates for the first time since 2020. For homeowners and those who’ve been looking to get on the property ladder, the past few years have been tough, but there are signs of it already changing. Rates on mortgage deals have been falling, and it’d be feasible that more cuts will follow. For those looking to buy, now is the time to seek advice and get mortgage ready.”
How does the base rate affect UK mortgage rates?
If the base rate remains stable, then mortgage rates likely will too. Because fixed mortgage rates are determined more by swap rates than anything else, we have to look at the bigger picture.
The base rate is an important factor in how swap rates are determined. While not the only thing that makes a difference, lenders use the swap rate to determine mortgage rates. If the base rate remains stable, then swap rates likely will too, though because they are betting on what happens in the future, there may be variation.
When it comes to variable and tracker mortgages in the UK, mortgage rates are far more closely linked to the base rate, as the lender is not setting a fixed point for the interest rate against the swap rate.
Why do mortgage rates change in the UK?
Inflation plays a big part in the cost of mortgages, since the BoE will likely raise the base rate to try and keep inflation balanced. We’ve seen this over the course of the last few years, when base rates started rising in December 2021. Mortgage rates will always fluctuate slightly, but big changes happen when the market starts to shift dramatically.
Is 2024 a good time to remortgage?
Yes, 2024 is as good a year as any to remortgage because if you don’t, you’ll move onto your lender’s standard variable rate (SVR). SVR rates tend to be significantly higher than fixed rate mortgages, so you’ll end up paying more than you need to if you don’t remortgage.
If you’re coming off a low interest rate and remortgaging in 2024, your monthly payments will likely still increase. That being said, it will still be cheaper to go onto a fixed rate than the lender’s SVR.
We can help you track your mortgage and let you know when a better deal becomes available based on your unique circumstances. It’s free to use, and could help you save some money both before your deal ends and after.
If your fixed rate is not expiring this year, you have some leeway to see if mortgage rates will come down before moving onto another deal.
If you need to decide what’s going to work best for you, get in touch with a mortgage adviser and talk through your options.
Mortgage rate forecast 2025
Though mortgage rates have increased slightly this year, the base rate is expected to fall to 3% by the end of 20253. This will likely have an impact on mortgage rates, so we may see drops there as well.
Time will tell what mortgage rates will be in 2025, but at the moment it’s looking positive.
Is inflation coming under control?
The inflation rate in the UK is currently showing signs of stability. As of May, 2024, UK inflation sits at 2.0%. This is a big decrease from its peak of 11.1% in October, 2022, which was the highest it had been in over 40 years. While prices are still rising, they’re not increasing as swiftly as they were. This suggests that inflation may be coming under control, but there may still be fluctuations.
Talking to an adviser about interest rates
A mortgage adviser can explain how both interest rates affect your mortgage options. They can also help you understand how different types of mortgages react to interest rate changes.
Advisers have access to a wide range of mortgage products from a variety of lenders, so they can shop around to find you a competitive rate. Talk to us today and let’s discuss your financial and homeownership goals.
Even if your fixed rate is not expiring this year, talking to an adviser can be helpful. They can assess your situation and advise whether waiting for potential rate drops makes sense, or if securing a fixed rate now is the better option for you.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Frequently asked questions
The base rate is a figure set by the Bank of England that determines how much it costs to borrow money. It’s currently 5.25%.
The Bank of England adjusts the base rate to influence the economy. They may raise rates to combat inflation and rising prices, or lower rates to increase spending.
A higher base rate makes borrowing more expensive, which discourages people from taking out loans. This reduces spending and slows down inflation. A lower base rate means that borrowing is cheaper, which encourages spending and potentially increases inflation.
For most mortgages you can, though your specific mortgage contract will highlight how much you can overpay by before you might be charged an early repayment fee.
A negative base rate would be unusual, but not impossible. It would indicate a weak economy and the Bank of England have not ever introduced a negative base rate.
Stable interest rates don’t necessarily impact house prices. Lower interest rates make borrowing cheaper, so demand increases and house prices go up. Conversely, high interest rates can lower the demand, and therefore house prices.
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