If the Bank of England Held Rates at 3.75%, Why Are Mortgage Rates Going Up?

On 30 June 2026, the Bank of England announced that it would keep the Base Rate unchanged at 3.75%.

For many homeowners and prospective buyers, this seemed like good news. After all, if interest rates have not increased, surely mortgage rates should remain stable too?

Yet over the past seven to ten days, many lenders have increased selected mortgage rates, particularly fixed-rate products.

At first glance, this appears contradictory.

How can mortgage rates rise when the Bank of England hasn't increased interest rates?

The answer lies in understanding the difference between the Bank of England Base Rate and swap rates.

While the Base Rate dominates the headlines, swap rates are often the most important factor when it comes to pricing fixed-rate mortgages.

The Common Misunderstanding

Many people assume that mortgage rates move directly in line with the Bank of England Base Rate.

The reality is more complicated.

The Base Rate certainly influences the mortgage market, but it is not the primary factor used by lenders when pricing fixed-rate mortgages.

In fact, lenders often react to movements in financial markets long before the Bank of England makes any changes.

This is why you may sometimes see:

• The Bank of England cutting rates while mortgage rates increase.

• The Bank of England holding rates while lenders increase pricing.

• Mortgage rates falling before any official rate cut occurs.

To understand why, we need to look at swap rates.

What Is the Bank of England Base Rate?

The Bank of England Base Rate is the interest rate set by the Bank of England.

It influences the cost of borrowing across the UK economy and acts as the benchmark rate for many financial products.

The Base Rate has a direct impact on:

• Tracker mortgages

• Some variable-rate mortgages

• Savings accounts

• Personal loans

• Business lending

When the Bank increases the Base Rate, borrowing generally becomes more expensive.

When it reduces the Base Rate, borrowing often becomes cheaper.

However, fixed-rate mortgages operate slightly differently.

What Are Swap Rates?

A swap rate is essentially the financial market's prediction of where interest rates are likely to be in the future.

Banks and lenders use swap markets to manage the risk associated with offering fixed-rate mortgages.

Let's imagine a lender offers a customer a five-year fixed mortgage.

The lender is committing to a fixed interest rate for the next five years.

But what happens if interest rates rise significantly during that period?

The lender needs a way to manage that risk.

This is where swaps come in.

Through the swap market, lenders effectively exchange variable interest rate exposure for fixed-rate certainty.

The cost of doing this is reflected in the swap rate.

Why Swap Rates Matter More Than the Base Rate for Fixed Mortgages

When pricing a five-year fixed mortgage, lenders typically look at the five-year SONIA swap rate.

SONIA (Sterling Overnight Index Average) is the benchmark rate used within UK financial markets.

The swap rate effectively becomes the lender's wholesale funding cost.

A simplified example might look like this:

Five-Year SONIA Swap Rate: 3.40%

Lender Margin: 1.00%

Operational Costs and Risk Provision: 0.50%

Resulting Mortgage Rate: Approximately 4.90%

If the swap rate rises from 3.40% to 3.80%, the lender's funding cost has increased.

Even if the Bank of England Base Rate remains unchanged, the lender may need to increase mortgage rates to maintain profitability.

This is exactly what we have seen happening recently.

Why Have Swap Rates Increased Recently?

Financial markets do not focus solely on today's interest rates.

They focus on what might happen tomorrow.

Over recent weeks, markets have become increasingly cautious about several factors:

Inflation Remains a Concern

Although inflation has fallen significantly from previous highs, there are still concerns that it may remain above the Bank of England's long-term target for longer than expected.

If inflation proves stubborn, future rate cuts could be delayed.

Markets react to this possibility immediately.

Government Borrowing and Gilt Yields

Swap rates often move alongside UK Government bond yields, commonly known as gilts.

When investors demand higher returns for lending money to the Government, gilt yields rise.

Higher gilt yields frequently lead to higher swap rates.

In recent weeks, rising gilt yields have contributed to increased mortgage funding costs.

Global Economic Uncertainty

Financial markets continue to monitor geopolitical tensions, international trade disruptions, energy markets and global inflation pressures.

Even events taking place thousands of miles away can influence investor sentiment and future interest rate expectations.

When uncertainty increases, swap rates often react.

Why Are Lenders Increasing Rates Now?

Mortgage lenders do not simply react to the Bank of England's latest announcement.

They continually monitor financial markets and future funding costs.

If swap rates increase over several days or weeks, lenders may decide to:

• Increase selected fixed-rate products.

• Withdraw existing deals.

• Launch replacement products at higher rates.

• Adjust pricing across specific loan-to-value bands.

This explains why many lenders have increased rates recently despite the Base Rate remaining unchanged.

Their underlying cost of funding fixed-rate mortgages has increased.

What Does This Mean for Homebuyers?

The most important lesson is not to focus solely on the Bank of England.

While the Base Rate remains important, fixed mortgage pricing is often influenced more by swap rates and market expectations.

This means borrowers should avoid assuming that:

• A Base Rate hold means mortgage rates will remain unchanged.

• A future Base Rate cut automatically means cheaper fixed mortgages.

• Waiting will always result in a better deal.

Mortgage markets are forward-looking.

By the time a rate decision makes the headlines, lenders and financial markets have often already priced it in.

What Does This Mean for Existing Homeowners?

If your current mortgage deal is ending within the next six months, it may be sensible to review your options sooner rather than later.

Many lenders allow borrowers to secure a new deal several months before their current rate expires.

This can provide valuable protection if rates continue to increase while still allowing flexibility should better options become available.

Final Thoughts

The Bank of England's decision to hold the Base Rate at 3.75% has naturally attracted significant attention.

However, the recent increases in mortgage rates demonstrate an important truth about today's market.

Fixed-rate mortgages are not priced primarily from the Base Rate.

They are largely driven by swap rates, which reflect financial markets' expectations of future interest rates, inflation and economic conditions.

At the moment, those expectations have become more cautious, causing swap rates to rise and prompting lenders to reprice their mortgage products.

Understanding this distinction can help borrowers make better decisions and avoid being misled by headlines alone.

How We Can Help

At Cambs Ely Mortgages, we monitor swap rates, lender pricing and market developments every day.

With access to over 200 lenders, we can help you understand your options and identify suitable mortgage solutions based on your individual circumstances.

Whether you're buying your first home, moving property or reviewing an existing mortgage, we're here to help you navigate an increasingly complex market.

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