UK Swap Rates

Swap rates are market interest rates used by banks and lenders when pricing fixed-rate lending.

A 2 year swap rate gives an indication of what the market thinks fixed-rate money costs over the next 2 years. A 5 year swap rate does the same over 5 years.

Fixed mortgage rates are not set directly by swap rates, but swaps are one of the key ingredients lenders use when pricing fixed deals. When swap rates rise, fixed mortgage rates often become more expensive. When swap rates fall, lenders may have room to reduce fixed rates.

The Bank of England Base Rate mainly affects tracker mortgages and standard variable rates. Swap rates are more closely linked to fixed-rate mortgage pricing because they reflect market expectations for future interest rates.

Mortgage lenders price fixed-rate deals using more than today's Bank of England Base Rate. They also look at wholesale funding costs and market expectations for where interest rates may go next.

That is why fixed mortgage rates can rise or fall even when the Bank of England has not changed Base Rate. If markets expect rates to stay higher for longer, swap rates may rise and fixed mortgage deals can become more expensive. If markets expect future rates to fall, swap rates may fall and lenders may have room to reduce fixed mortgage pricing.