Why Mortgage Rates Are Falling Even Though the Base Rate Hasn't Moved

Six lenders cut their mortgage rates within 24 hours of each other this week. Nationwide, Virgin Money, BM Solutions, Halifax, Kensington and Lloyds all trimmed pricing on 7 July — Nationwide's fourth round of cuts in a month alone. If you've been sitting tight because you assumed nothing would move until the Bank of England's next meeting, it's worth knowing the mortgage market has quietly been moving without it.

The base rate held. So why are rates falling?

The Bank of England's Monetary Policy Committee voted 7–2 to hold the base rate at 3.75% on 18 June, with two members actually pushing for a hike given services inflation still running at 3.7%. On paper, that's not an environment where you'd expect mortgage deals to get cheaper.

But fixed-rate mortgages aren't priced off the base rate directly — they're priced off swap rates, which reflect what the financial markets expect interest rates to average over the next two to five years. And swap rates have been falling steadily. The two-year swap rate has dropped to around 3.91%, and the five-year to just under 4%, down from roughly 4.16% and 4.18% respectively at the start of June.

When swaps fall, it gets cheaper for lenders to fund fixed-rate lending. Several are choosing to pass that saving straight into pricing to win business, rather than bank the margin — which is what's creating the “price war” headlines this week.

Where rates actually stand today

As things stand, the average two-year fixed rate is around 5.51%, and the average five-year fixed is sitting at a very similar level. The best deals are considerably sharper than the averages — some five-year fixes are available from around 4.33% for the right circumstances, and the lowest two-year tracker deals are down near 3.96%, which is now undercutting a fair few fixed products.

The next MPC decision lands on 30 July. Markets aren't pricing in a dramatic move either way, but a chunk of the recent rate cuts already assumes rates stay flat or drift down gently over the next year or two. If the tone from the Bank turns more hawkish, some of this week's price war could reverse quickly.

What this means if you're remortgaging or buying

1. Don't assume the rate you were quoted a few weeks ago is still the best on offer. Lenders are repricing weekly at the moment, sometimes more than once a week. If your broker hasn't rechecked your options in the last fortnight, ask them to.
2. If your current deal ends in the next six months, get a rate locked in now — but check it's switchable. Most mainstream lenders let you swap down to a cheaper rate for free if one becomes available before you complete, so there's little downside to reserving a rate early.
3. Trackers deserve a proper look right now, not just an afterthought. With some two-year trackers beating the best fixes, they're a reasonable option if you can stomach a bit of movement and think rates are more likely to drift down than up over the next year.
4. Keep an eye on 30 July, but don't build your whole plan around it. A single MPC decision rarely moves mortgage pricing as much as people expect — the swap market has usually already done the heavy lifting by the time the announcement lands.

What I'd actually do

I'd stop trying to call the exact bottom of the market — nobody reliably does, and the cost of guessing wrong is usually higher than the cost of just getting on with it. What I would do is make sure whoever's arranging your mortgage is actually watching the market daily, not just at application stage, and that you've got a rate reserved with the flexibility to move to something cheaper if this price war keeps running.

If you're due to remortgage in the next few months, or you're mid-way through a purchase and wondering whether to hold out, it's worth a quick conversation rather than guessing. I'm always happy to run through your specific numbers.

Kindest regards

Ian

Ian A Moore CeMAP — Director, IM Mortgage Consultancy Limited

Your home may be repossessed if you do not keep up repayments on your mortgage. IM Mortgage Consultancy Limited is authorised and regulated by the Financial Conduct Authority. This article is for general information only and does not constitute mortgage advice; rates and figures quoted were accurate at the time of writing and are subject to change.