Why mortgage rates go up and down – and it’s not just the base rate

From credit ratings to ‘swaps’, what determines the interest rates lenders set on their mortgage deals?

When the time comes to select a mortgage, there are few more important considerations than the interest rate.

After all, the interest rate plays a huge part in determining the size of your monthly repayments and how much it will eventually cost you to clear the loan in its entirety.

Yet very few of us understand how lenders set these rates, and the various factors that influence them and determine whether they will go up or down.

One common misconception is that the base rate, set each month by the Bank of England’s monetary policy committee (MPC), is a big driver in the rates that we pay for our home loans.

This isn’t really true though.

What really drives it?

Base rate has barely moved in the last decade, and yet we have seen significant movement on the rates charged by lenders. For example, according to Moneyfacts the average interest rate for borrowers with a 10% deposit on a two-year fixed deal has dropped from 4.8% in 2013 to just 2.65% today.

That said, if base rate moves, it may have a direct impact on the size of your repayments. Tracker deals, as the name suggests, track the base rate. So your rate might be base rate plus 1%, which would mean at the moment an interest rate of 1.75%. If base rate was increased to 1%, then your mortgage rate would rise alongside it to 2%.

If you are on your lender’s standard variable rate (SVR) – the rate lenders move you to once your initial fixed or tracker rate finishes – then these will usually be hiked up following a base rate move too, though the lender isn’t limited in how much they can increase the SVR. In other words, even if base rate only goes up by 0.25%, your mortgage rate could go up by more.

However, if you are on a fixed rate mortgage, your rate won’t be impacted at all by any change in the base rate.

What about wholesale costs?

With many things we buy, from the petrol we put into our cars to the gas and electricity we use to power our homes, the price we pay is significantly influenced by the wholesale costs.

In other words, the more that the supplier has to pay to get hold of that fuel, the more we then pay in order to purchase it from them. In theory, when the wholesale costs go down, that should make it cheaper for us to buy too, though in reality that doesn’t always happen.

It’s much the same with money. Mortgage lenders don’t always have huge pots of cash just waiting to be lent out – they might need to bring in some financing through the wholesale markets, to then lend out with a little on top for the sake of their profits to us borrowers.

As a result, the cost of bringing in those funds play a huge role in determining what rates lenders are able to offer on their mortgage deals.

The protection of swap rates

These are a little complicated but basically allow lenders to protect itself against the risks of the interest rates it pays on accessing funds moving out of step with the rates it charges on lending that money out.

Think of it this way – if the lender is committing to lending out money at 2% on a two-year fixed rate mortgage, it wants to be able to protect itself against the cost of raising that money moving above 2%. Lenders include the cost of these ‘swaps’ when pricing up deals – as it becomes more expensive to hedge, then its mortgage rates rise too.

How risky are you?

A big influence on the interest rate charged on different mortgages will be how risky the target borrowers are likely to be.

This can take a couple of different forms. For example, if you have a larger deposit you’re seen as less of a risk by lenders, so you’ll tend to enjoy much lower interest rates than the deals on offer to borrowers with a deposit of just 5-10%

Similarly, while most lenders restrict their deals to borrowers with near-spotless credit histories, there are some products which are designed for people who have been through CCJs and have a less than perfect record. These deals will come with higher interest rates though.

 How much competition is there?

Competition is definitely a good thing for mortgage borrowers.

Not only does it mean you have more deals to choose from, but lenders are pushed towards lowering their rates – and making less of a profit – on their products, in order to try to stand out from the competition.

The mortgage arrangement fee

The interest rate isn’t the only way that a lender makes money from its mortgage product. Borrowers will also generally have to pay an arrangement fee, or product fee, in order to secure that deal.

These can vary sharply in size on residential mortgages, from nothing at all to almost £2,000.

Mortgage deals with the lowest interest rates tend to come with more significant product fees, while you’ll have to commit to a higher interest rate in order to secure a fee-free deal. These fees can be paid all in one go, or added to your mortgage balance. Just remember that if you do so, you’ll be paying interest on it along with the rest of your loan, so it will end up costing you far more over the long term.

By John Fitzsimons

09:00, 14 APR 2019

What will Brexit mean for interest rates?

The Bank of England recently held the base rate at 0.75%, as the Monetary Policy Committee took a ‘wait and see’ approach to Brexit. But with the UK’s exit from the EU potentially just weeks away, should you brace for a base rate shock in coming months?

The prime minister has secured a new, flexible extension to Article 50, meaning the UK is now set to leave the EU on 31 October at the latest, but that it could end up leaving sooner.

Changes to interest rates can have far-reaching consequences, on everything from your personal finances to the wider economy.

The Bank of England sets the interest rate – also known as the base rate – in response to current events and expected economic performance to try to keep inflation around its 2% target.

Deal or no deal, Brexit is set to have a seismic impact on the UK economy, so how will the Bank respond, and what will it mean for you.

Why the Bank of England base rate matters

Sometimes known simply as the interest rate, the Bank of England base rate influences how much banks and other lenders charge you to borrow money, and how much interest is paid on your savings.

In the case of a base rate rise, banks will tend to raise mortgage interest rates as well as loans, pushing up the cost of borrowing money. At the same time, interest rates on savings are also likely to increase, meaning your savings pot could grow a little faster.

Lowering the base rate could have the opposite effect, with mortgage rates becoming slightly cheaper, but savings deals offering lower returns.

Factors that influence the base rate

When setting interest rates, the MPC’s goal is to keep inflation as close to 2% as possible. Its decisions are informed by an inflation forecast, which takes into account:

  • the current inflation level
  • wage growth
  • the cost of goods (including the impact of changes in the exchange rate)
  • consumer spending
  • investment levels

Interest rate decisions also consider unemployment rates and economic growth figures – the latter of which must not exceed a 1.5% ‘speed limit’ or inflation could rise above target.

The Bank of England puts it like this: ‘Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates.’

Timeline: interest rates since the Brexit referendum

As Brexit looms on the horizon, you might wonder how this unprecedented political event might affect the economy. While no one has a crystal ball, it can be helpful to look at what happened to the base rate during the past two years of Brexit votes and negotiations.

August 2016: Just over a month after the referendum on EU membership, the Bank of England cut the base rate in half – from 0.5% to 0.25%. This was the first time the interest rate had changed since March 2009.

Interest rates were already at a historic low before this reduction. In the wake of the 2008 financial crisis, the base rate fell dramatically from 5% to 0.5%, where it remained for almost a decade.

November 2017: the MPC restored the base rate to pre-referendum levels in order to combat rising inflation. The Bank linked this decision directly to Brexit, saying ‘the fall in the pound following the Brexit vote’ means that things from abroad cost more, ‘and that means higher prices in the shops’.

 August 2018: The MPC raised interest rates from 0.5% to 0.75% – the first rise above 0.5% in almost a decade. This decision was based on the economy’s steady growth, and the accompanying report noted that most referendum-related price hikes appeared to have happened already.

 February 2019: In January, inflation fell below the Bank of England’s target of 2%. This led the MPC to keep the base rate at 0.75% in February.

 March 2019: Just over a week before the UK’s original EU exit date of Friday 29 March, the MPC voted to keep interest rates at 0.75% once again, citing low unemployment and inflation almost exactly on target at 1.9%. Minutes from the group’s meeting did, however, discuss the negative effect Brexit could have on businesses.

What decision-makers have said about post-Brexit interest rates?

With so much uncertainty around what kind of Brexit we’ll see, it’s difficult to predict what the MPC will decide to do when (or if) Brexit actually takes place.

Still, key decision makers have hinted at what form post-Brexit monetary policy could take:

Mark Carney, governor of the Bank of England

In a November 2018 press conference, Carney said that rates could go up or down after Brexit, depending on the circumstances: ‘Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply, and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.’

Carney reiterated this line at January’s World Economic Forum in Davos, saying ‘it’s not automatic which way policy would go in the event of a hard Brexit’.

Gertjan Vlieghe, MPC member

Speaking to the Treasury Select Committee late in February, Vlieghe went slightly further than Carney, saying ‘just because [interest rates] could go in either direction, doesn’t mean that each one is equally likely’.

The rate-setter supported Carney’s point that any interest rate decisions will have to be made in real time, after the committee can see what impact Brexit has had.

Despite this, Vlieghe did outline how a likely fall in the pound’s value could lead to higher inflation, which would require the MPC to take action.

The monetary policy committee (MPC)

In February’s inflation report, the MPC, which includes Vlieghe and Carney, said: ‘Whatever form Brexit takes, we will keep inflation low and support the economy.’

As we saw in 2017 and 2018, the MPC can opt to increase the base rate when they want to lower inflation. However, there will be other factors, such as a potential lack of consumer and business confidence that the Bank will have to contend with after Brexit.

Minutes from March’s MPC meeting said, ‘Brexit uncertainties also continue to weigh on confidence and short-term economic activity, notably business investment.’ The minutes also refer to ‘the possibility of further cliff-edge uncertainties that could have a significant effect on spending’ in the lead up to a delayed Brexit deadline.

However, the minutes note that if the economy develops in line with its projections, the Bank will likely raise rates ‘at a gradual pace and to a limited extent’ in the future.

What economists say about interest rates post-Brexit

Rocio Concha, chief economist at Which?

‘It’s clear that the political uncertainty surrounding Brexit is preventing the Bank of England from raising rates beyond their current level. In the medium term though, the Bank’s intention is still to gradually increase rates closer to their pre-recessionary norms – but only if the UK’s departure from the EU goes smoothly.

In the event of a no-deal Brexit, we expect that the most likely response is for rates to fall in order to stimulate a weakened economy. But, as the Bank says, that is by no means certain. A fall in the value of the pound will undoubtedly lead to higher prices and the Bank may find itself in a difficult position, balancing economic stimulus with tackling inflation.’

Ben Brettell, senior economist at Hargreaves Lansdown

Brettell told Which? Money: ‘The Bank of England has been setting a neutral tone as Brexit approaches. The minutes of recent meetings reiterate that the MPC still sees the need for higher interest rates in the coming years, but a deteriorating global growth outlook and mounting Brexit uncertainty have put paid to any thoughts of tighter policy for now.

Where we go from here is highly uncertain, as we still have little clarity over what Brexit will look like, if and when it happens. An orderly Brexit could see the Bank refocus on wage growth and raise rates later this year. A no-deal scenario would likely see sterling fall 5-10%, causing a spike in inflation, but I’d expect the Bank to look through this and cut rates to support the economy.’

Howard Archer, chief economic adviser to economic forecasting group EY Item Club

Archer told the Press Association: ‘Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.’

What can you do to prepare?

If the Bank of England base rate does change after Brexit, the key things that might be affected are your mortgage and your savings.


For savings, a base rate rise could see your account’s interest rate increase, giving you better returns. On the other hand, if the base rate is cut, you might see your interest fall.

Switching to a fixed rate account will secure you against any potential Brexit turmoil, but you’ll miss out on the possible benefits of a base rate rise.

If you’re thinking of switching, you can compare hundreds of savings account at Which? Money Compare to find the best home for your savings.


Variable rate and tracker mortgage customers could face higher repayments if the base rate rises. If you’re worried about this, you could remortgage to a fixed-rate deal in order to secure cheaper repayments for a set period.

However, if the base rate is lower, variable rate borrowers may see their repayments become cheaper. You’ll miss out on this if you’re on a fixed rate.

By Ian Aikman (Which?) 11th April 2019

What are the top issues that could ruin a house sale?

With nearly half of all house sales collapsing before completion during Q4 last year, the process of selling your home is undoubtedly stressful and not guaranteed to go the way you want it to.

In order to reduce the chances of your sale falling through, it’s worthwhile to be aware of the qualities your property has which may make the sale difficult, so you can work on resolving them before you find a buyer. So what are the most common issues that can scupper the sale of a property? NAEA takes a closer look.

Nuisance neighbours

Whether it’s a dispute over boundaries, shared access to driveways or anti-social noise, falling out with your next-door neighbour is not only stressful but can adversely affect the sale of a property.

Anyone looking to sell their property is legally obliged to disclose information about any disputes they’ve had with neighbours on the ‘Seller’s Property Information Form’ provided by their solicitor. Omitting or providing false information could lead to legal action taken against you by the buyers, so honesty is the best policy.

Structural problems

If your home has any serious structural defects which aren’t visible on first inspection, this can put serious doubt in the minds of buyers. For example, if the survey finds there’s something wrong with the foundations, they may wonder about how long the house will be around, whether it’s even safe to live in, and of course that their mortgage provider may refuse to lend against the property. If you’re aware of a major structural problem with your property, try and fix it before putting it on the market. If you are not in the financial position to repair the issue, get an appropriate contractor to give you an estimate for repair and be transparent about it. You should disclose everything to the buyer and provide the documentation on how to remedy the issue.

By doing this leg work, you’ll eliminate doubt in the mind of the buyer.

Japanese knotweed

Knotweed is often found during site surveys, but while it may look small and contained, do not underestimate the scale of the potential problem; the plant can grow up to nine feet in height and roots up to three metres deep. It’s important to have it treated professionally as soon as possible to avoid further growth and prevent the property sale from falling through.

The invasive plant, Japanese Knotweed, is more common than you think, and it can damage the foundations of your home and significantly devalue it if it’s at risk of subsidence as a result. If you think you can see any in your garden, call a professional to excavate it as soon as possible. It also affects the mortgage ability as lenders take a dim view if it is present.

Rail timetable changes

If your property is in a commuter town, any changes to train timetables which make it more difficult to commute to the nearest city, could have detrimental effect on house prices and the saleability of your property altogether. If you’re in an area popular with commuters, keep a beady eye out for any changes to the timetable.

Planning permission

Buying a property without planning permission for any works is risky for prospective buyers. If you’ve had any work carried out while you’ve been living in the property, such as extensions or conversions, make sure you obtained appropriate planning permission and building regulations, and have access to these documents. If you haven’t got the right documents, you may find that you must pay for them retrospectively before agreeing a sale.

Mark Hayward, Chief Executive, NAEA Propertymark comments “Almost half of all house sales fell through before completion in the final quarter of 2018, so concerns from buyers and sellers that it could happen to them are entirely justified. To try and prevent this from happening, there are several things you can do, like using a Propertymark Protected estate agent who will guide you through the process and help you navigate any unexpected events



Property Reporter

9th April 2019


Mortgage rates slashed for buyers with 5% deposits, as lender price war intensifies

Average two-year fixed rate drops to just is 3.3%, Moneyfacts says

A mortgage price war to attract first-time buyers with deposits as low as 5 per cent is intensifying, with providers slashing their rates, analysis has found.

The rate gap between the average two-year fixed-rate mortgage on the market for borrowers with a 5 per cent deposit, and the typical two year-fix for those with a 10 per cent deposit, is now at its smallest in six years, Moneyfacts.co.uk found.

This is despite borrowers with the smallest deposits often being seen as more “risky” and recent reports suggesting uncertainties relating to the economy and Brexit are having an impact on the housing market.

The 0.65 percentage point gap in rates is smallest Moneyfacts has seen since February 2013. The average two-year fixed rate for borrowers with a 5 per cent deposit is 3.30 per cent, while the average rate for borrowers with a 10 per cent deposit for this type of mortgage is 2.7 per cent.

The narrowing rate gap has been driven by “healthy competition” by providers looking to attract people with a 5 per cent deposit, Moneyfacts said.

Darren Cook, a finance expert at Moneyfacts.co.uk, described first-time buyers as the “lifeblood of the mortgage market”.

He said: “Providers need to factor in the greater potential of default on higher-LTV (loan-to-value) mortgages, which is why rates are typically higher at 95 per cent LTV – but as we’ve seen, they’re increasingly willing to sacrifice these margins in order to compete.”

Mr Cook said the average two-year fixed-rate mortgage for borrowers with a 10 per cent deposit has “changed little” since October 2017, increasing from 2.62 per cent by 0.03 percentage points to reach 2.65 per cent now.

Over the same period, the average two-year fixed mortgage rate for borrowers with a 5 per cent deposit has fallen significantly, from 4.19 per cent in October 2017 to 3.30 per cent now.

Mr Cook said: “This is fantastic news for potential first-time buyers who are looking to find their first step on the housing ladder.

“However, even though mortgage rates at the 95 per cent LTV tier are falling, it may not be that simple.

“Since the financial crisis, the Financial Conduct Authority has introduced clear affordability measures that mortgage providers must follow, so potential first-time buyers will still need to jump through several affordability hoops before they find themselves on the property ladder.”

Vicky Shaw

The Independent