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Moneywatch Finance
WHY ARE MORTGAGE RATES RISING WHEN BANK RATE HASN’T CHANGED?
The Bank of England has kept its headline interest rate at 3.75%, yet mortgage borrowers are seeing fixed-rate deals become more expensive. So what is going on, and what should you do if you are buying a home or your current deal is coming to an end?
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If you thought an unchanged Bank Rate should mean unchanged mortgage rates, you would be forgiven for wondering what has happened to the market. On 17 September, the Bank of England’s Monetary Policy Committee voted to keep Bank Rate at 3.75%. Yet the cost of new fixed-rate mortgages has been moving higher.
In fact, the Bank of England says its measure of quoted rates on two-year fixed-rate mortgages is now around 0.95 percentage points higher than it was before the conflict in the Middle East began earlier this year. For borrowers, that can seem contradictory. It isn’t.
The reason is that Bank Rate is only one part of the story when lenders decide how much to charge for a fixed mortgage. And right now, the financial markets that help determine the price of those mortgages have been moving even though Bank Rate itself has not.
Bank Rate stayed at 3.75%, but the decision was not unanimous First, it is worth looking at what actually happened at the Bank of England’s latest meeting.
The Monetary Policy Committee voted six to three to leave Bank Rate unchanged at 3.75%. Three members wanted an immediate increase to 4%.
The Bank is grappling with renewed inflationary pressure, particularly from higher energy prices. UK Consumer Prices Index inflation reached 3.1% in August, above the Bank’s 2% target, and the Bank said inflation was likely to rise further over the coming quarters. That does not mean Bank Rate will necessarily rise at the next meeting.
But it does help explain why financial markets have become more concerned about how long interest rates could remain elevated. And that matters enormously for fixed mortgages.
Fixed mortgage rates do not simply follow Bank Rate
This is probably the biggest misconception about mortgage pricing. Bank Rate influences borrowing costs across the economy, but lenders do not generally set a two-year or five-year fixed mortgage simply by taking today’s Bank Rate and adding a margin.
Fixed mortgages are much more closely linked to what are known as overnight index swap rates, or OIS rates.
The Bank of England describes medium-term OIS rates as key reference rates for fixed-rate mortgages. You can think of these market rates as reflecting the price of interest rates over the period ahead, together with a premium investors require for uncertainty.
So a lender offering you a two-year fixed mortgage today is interested not just in Bank Rate this morning, but in the expected cost and risk of providing fixed-rate money over the next two years. When those market rates rise, fixed mortgage rates can rise too. They can do so without the Bank of England changing Bank Rate at all.
COULD YOU SAVE ON YOUR MORTGAGE? Always speak to an independant financial adviser or mortgage broker, They will be able to provide guidance on the options available to you based on the various lenders affordability, eligibility & lending criteria.
And those market rates have risen This is what has happened during 2026. The Bank of England says UK financial conditions have tightened,
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