Why a Bank of England Base Rate Cut Doesn’t Automatically Lower Fixed Mortgage Rates

If there are reductions to the Bank of England’s base rate, many clients are understandably asking whether this means fixed-rate mortgage deals will now become cheaper. While it may seem intuitive that a base rate cut should reduce all types of borrowing costs, fixed-rate mortgage pricing is driven by different forces—primarily swap rates and the SONIA index.

Here’s a brief breakdown of why a drop in the base rate doesn’t necessarily mean fixed rates will follow.

What Is the Base Rate?

The Bank of England base rate is the interest rate at which commercial banks borrow money from the central bank. Changes to the base rate influence variable-rate lending and certain types of borrowing, such as tracker mortgages or some standard variable rates (SVRs). However, fixed-rate mortgages are priced using a more forward-looking measure.

The Role of Swap Rates in Fixed Mortgages

Swap rates are agreements between financial institutions to exchange fixed interest rate payments for variable ones, based on expected future interest rates. Lenders use swap rates to price fixed mortgage products, because these rates reflect market expectations about where interest rates are heading over the term of the mortgage.

So, if markets believe the Bank of England’s rate cut is temporary—or if inflation remains sticky—swap rates may not fall, and could even rise, despite a base rate reduction. This can result in little or no movement in fixed-rate mortgage pricing.

Understanding SONIA

SONIA (Sterling Overnight Index Average) is a key benchmark interest rate based on actual overnight funding transactions. It’s closely monitored by financial markets and plays a significant role in shaping swap rates.

Although SONIA reflects short-term interest rate movements, including those tied to the Bank of England’s base rate, it is influenced by broader market conditions—such as inflation forecasts, investor sentiment, and global economic data. These factors can lead to a disconnect between the base rate and the swap rates used for fixed mortgage pricing.

The Takeaway for Borrowers

Even if the base rate is cut, fixed mortgage rates won’t automatically fall. They are determined by the cost to lenders of borrowing in the wholesale markets, which is guided by swap rates and forward-looking indicators like SONIA.

For clients considering fixing their mortgage, it’s important to understand that lenders adjust pricing based on where they think interest rates are headed, not just where they are today. Therefore, the decision to fix should be based on your individual circumstances, risk appetite, and long-term financial goals—not just recent changes to the base rate.