Swap rate vs base rate, explained
The Bank of England base rate is 3.75%, but fixed mortgage rates are often higher because they are not priced off the base rate at all. Fixed rates are priced off swap rates: the market cost to a lender of fixing its own funding for the same term. Swaps move on expectations of future rates, so a fixed rate can be above or below the base rate, and can even fall while the base rate is held.
The short version
The Bank of England base rate is 3.75%[Bank of England]. People reasonably expect a fixed rate to be close to it, and are surprised when a two or five-year fix is quoted higher. The reason is that the base rate and a fixed mortgage rate are set by two different mechanisms. The base rate drives variable and tracker products. A fixed rate is driven by swap rates.
What a swap rate is
When a lender sells you a five-year fix, it takes on the risk that rates rise during those five years. To protect itself, it effectively buys certainty in the markets through an interest rate swap, paying a fixed rate to receive a floating one. The fixed rate it pays is the swap rate for that term. That cost, plus the lender's margin, capital requirements and a buffer for risk, becomes your mortgage rate. So your five-year fix tracks the five-year swap, not the base rate.
Why fixes can move opposite to the base rate
Swap rates price in where the market thinks rates are going. If investors expect cuts over the next two years, the two-year swap can drop even while the Bank holds the base rate steady, and lenders may trim their fixed deals. Equally, if markets get nervous about inflation, swaps and therefore fixes can rise before the Bank moves at all. This is why fixed-rate pricing often seems to ignore the latest base-rate decision.
What this means for you
- A fix above the base rate is normal, not a rip-off: it reflects swap rates plus the lender's costs.
- Trackers and standard variable rates move with the base rate; fixes move with swaps.
- Fixed deals can improve between base-rate decisions, so timing a remortgage is about swaps, not just the next Bank meeting.
Common questions
If the base rate is 3.75%, why is my fix 5%-plus?
Because a fixed-rate mortgage is not priced off the base rate. It is priced off swap rates, which are what lenders pay to borrow at a fixed cost for the same length of time. Swap rates reflect the market's view of where rates are heading, plus the lender's margin and costs. They can sit above or below the current base rate.
What is a swap rate?
A swap rate is the fixed interest rate the financial markets will exchange for a floating rate over a set term, such as two or five years. Lenders use swaps to lock in their own funding cost when they sell you a fixed rate, so swap movements feed almost directly into fixed mortgage pricing.
Why can fixed rates fall when the base rate is held?
Because swaps move on expectations, not just today's base rate. If markets expect cuts ahead, swap rates can fall even while the Bank of England holds the base rate, and lenders may cut fixed deals in response. The reverse also happens.
Does the base rate affect anything then?
Yes, directly: it sets your lender's standard variable rate and most tracker rates. So variable and tracker products follow the base rate, while fixed products follow swap rates. They are two different mechanisms.
Founder, MortgageExplained, MortgageExplained
Adam spent nearly a decade as a mortgage adviser at Just Mortgages, with further experience in commercial finance. He is CeMAP and CF qualified. He built MortgageExplained to do one thing well: explain mortgages in plain English, then introduce you to a regulated broker when you are ready. Every page is written and reviewed by Adam.
Last reviewed: 29 June 2026