Bank of England Base Rate: Does it really matter?

Introduction

Host:
The Bank of England base rate sits at 5.25% once again. I really don’t know what this means — what exactly is the Bank of England base rate? I keep hearing it’s at 5.25%, and then it changes suddenly. What is this all about?

Understanding the Bank of England Base Rate

Expert:
That’s a good question, Pradish. The base rate has been 5.25% since August, which is good news for some borrowers.

The Bank of England base rate is the rate at which the Bank of England lends to other banks. Not all banks borrow directly from the Bank of England, but when they do, that’s the rate they pay. It’s known as the “Bank of England – the lender of last resort.”

So if a bank borrows from the Bank of England, it does so at the base rate, currently 5.25%.

What Are Swap Rates?

Host:
I hear a lot about this thing called “swap rates,” but I really don’t understand what that means. I do understand that the Bank of England base rate affects variable products, but apparently people say fixed rates are affected by swap rates. What does that mean?

Expert:
That’s right, Pradish. Fixed rates are generally connected to swap rates. If you’re monitoring fixed rates — for example, what rate you’ll pay on a fixed mortgage — you’ll want to look at the swap market.

The swap rate is the rate at which banks borrow money from the money market. So, if you take out a fixed-rate mortgage, the bank will often borrow money from the money market at a swap rate, add a markup, and lend it to you.

That’s why swap rates are directly linked to fixed mortgage rates. So, if you’re considering a fixed-rate mortgage, it’s better to monitor the swap rate rather than the Bank of England base rate.

Monitoring Base Rate and Swap Rates

Host:
So, I need to monitor swap rates rather than the Bank of England base rate — especially if I’m on a fixed deal. How exactly do I monitor swap rates?

Expert:
If I were you, Pradish, I’d monitor both. You should watch the Bank of England base rate if you’re considering a tracker mortgage, and also keep an eye on swap rates since many people go for fixed-rate deals.

Financial websites publish swap rates — you can find the current 2-year or 5-year swap rates easily online.

But the best option is to speak to a mortgage adviser — they monitor these rates for you and can guide you when it’s time to fix or remortgage.

Relationship Between Base Rate and Swap Rates

Host:
Looks like I’ll have to split my attention between the Bank of England base rate and swap rates — which might be a bit challenging. Is there any relationship between the Bank of England base rate and fixed rates?

Expert:
Technically, they’re two different things.

The Bank of England base rate is set based on the overall economy.

The swap rate reflects what banks can borrow from the market for specific terms (like 2 or 5 years).

They aren’t directly connected, but both affect borrowing costs in different ways.

That’s why it’s best to work with an adviser, whether it’s your bank or a mortgage broker — they monitor these trends and can guide you on when and what type of mortgage to choose.

Impact on 2-Year and 5-Year Deals

Host:
You mentioned 2-year and 5-year deals. How exactly do these rates impact those deals? Everyone’s asking whether to go for a 2-year deal or a 5-year deal. I believe there’s already a video about that on our YouTube channel, but could you explain which might be better?

Currently, 5-year deals seem cheaper, while 2-year deals are slightly more expensive. How do you determine which is better?

Expert:
That’s exactly what advisers help with.

If you think you might move house in the next 3 to 4 years, a 2-year deal might be better — because 5-year deals come with early repayment penalties.

An adviser can calculate those penalties and determine whether it’s worth fixing for 5 years.

At the moment, some 5-year deals are cheaper than 2-year deals. That suggests the market expects interest rates to fall in the future — which is why longer-term rates look slightly lower.

Final Thoughts

Host:
Looks like I’ll have to go home, sit at the table, and do some calculations — especially to track both the Bank of England base rate and swap rates.

Expert:
Exactly, Pradish — but that’s also why it’s helpful to have an adviser.

Advisers track both for you. If you’re on a mortgage and due for a remortgage, most advisers contact clients around six months before the deal ends.

They’ll tell you whether it’s better to stay on a tracker or move to a fixed rate, based on how swap rates and the base rate are moving.

That makes life much easier for you.

Conclusion

Host:
I should probably give you a call once I’ve gone through my notes so we can chat about what I should do next with my mortgage.

Expert:
Absolutely, Pradish. Team WIS is always here to help, but there are other advisers and banks too — go with whoever you feel most comfortable with. That’s the key to making the right decision for your situation.

Host:
Thank you so much — it was really nice having a chat with you.

Expert:
Thank you, Pradish.