How fixed mortgage rates are built
When a lender offers you a 5-year fixed mortgage at, say, 4.22%, that rate does not come from thin air. It is constructed from several layered components, the most important of which is the 5-year SONIA swap rate. SONIA — the Sterling Overnight Index Average — is the UK's primary benchmark interest rate, inherited from LIBOR after its 2021 retirement. In simple terms, it reflects the average rate at which major financial institutions lend to each other overnight using sterling.
Banks that write fixed-rate mortgages face a structural problem: they are committing to receive a fixed rate from a borrower for five years, but their underlying funding costs fluctuate. To manage that risk, they enter into interest rate swap contracts — agreements to exchange a fixed rate stream for a floating one. The cost of those swaps, expressed as the SONIA swap rate for the relevant term, becomes the floor beneath fixed mortgage pricing. The lender adds a margin for their costs and profit, product fees are amortised, and the headline rate you see on a comparison site emerges.
The crucial implication of this mechanism is that fixed mortgage rates respond to changes in market rate expectations before base rate itself has moved. When the bond market becomes convinced that the MPC is about to cut, SONIA swap rates fall immediately, and fixed-rate mortgage pricing falls with them — sometimes weeks before the MPC votes. This is why borrowers sometimes notice that fixed rates have already improved by the time an expected cut is formally announced.
How tracker mortgage rates are built
Tracker mortgages are considerably more straightforward in their construction. The lender sets a margin — for example, 0.79 percentage points — and charges you base rate plus that margin as your pay rate. The margin is contractually fixed for the life of the product or the initial term; only the base rate component moves. There is no swap pricing involved, no forward-looking market expectation built into the rate, and no forward rate exposure for the lender, because the risk of rate movements is passed directly to the borrower.
This structural simplicity is why trackers tend to look expensive relative to fixes when markets expect rates to fall. The lender is not trying to profit from a rate view; they are simply passing base rate through with a margin. When swap markets are pricing in significant cuts, those anticipated reductions are already embedded in fixed rates — making fixes look cheap relative to where the tracker will go once cuts materialise. Conversely, when markets expect rates to rise, the tracker starts cheap because the future rises haven't landed yet.
The UK rate cycle: 2021 to 2026
To understand current mortgage pricing, it helps to walk through what has happened to base rate and swap rates over the past four years, because much of today's market psychology was shaped by that extraordinary period.
In December 2021 the Bank of England base rate stood at 0.10% — a level held since the early days of the pandemic. Inflation was beginning to stir, driven initially by supply-chain bottlenecks as the global economy reopened, but the MPC's initial response was cautious. The first rise, to 0.25%, arrived at the December 2021 meeting, surprising some observers who expected inaction.
What followed was the sharpest tightening cycle the UK had experienced in over four decades. Russia's invasion of Ukraine in February 2022 sent energy prices surging across Europe, and UK CPI inflation reached a peak of 11.1% in October 2022 — a forty-one year high. The MPC responded aggressively, raising base rate at every meeting through 2022 and into 2023. By August 2023 it stood at 5.25%, having risen from 0.10% in under twenty months.
Swap markets were running ahead of base rate throughout this period. By the end of 2022, 2-year SONIA swaps were pricing rates well above 5%, which is why 2-year fixed mortgage rates briefly exceeded 6% — and in the immediate aftermath of September 2022's mini-Budget, briefly touched 6.5% for some products. Borrowers who took 5-year fixes in 2020 at rates below 2% were watching those deals end and facing a three-times higher rate on renewal.
The first cut arrived in August 2024, when the MPC voted by a narrow majority to reduce base rate by 0.25% to 5.00%. Further cuts followed through 2024 and into 2025, with base rate reaching 4.00% by early 2026. The cutting cycle has been cautious by historical standards, partly because UK services inflation and wage growth remained stickier than the MPC hoped. That caution is reflected in current swap pricing.
Where swap markets are positioned today
As of mid-2026, with base rate at 4.00%, SONIA swap markets are pricing roughly two to three additional 0.25% cuts over the following eighteen months, implying a base rate of approximately 3.25%–3.50% by the end of 2027. That expectation is baked into today's fixed-rate mortgage pricing.
What this means in practice: a 5-year fix at 4.22% today is not simply reflecting today's base rate of 4.00%. It is reflecting the market's view that base rate will average somewhere in the 3.50%–4.00% range over the next five years. If that forecast is accurate, the fix and a tracker end up roughly equivalent in total cost over the period. If cuts arrive faster and deeper — say, base rate falling to 2.75% by 2028 — the tracker materially outperforms the fix. If the cutting cycle stalls, or if a fresh inflationary shock forces rates back up, the fix materially outperforms.
This is the honest framing of the fixed vs tracker choice in 2026: not "will rates fall?" (markets already expect them to), but "will they fall faster and further than the consensus embedded in today's swap pricing?"
What has driven rates lower in 2025 and 2026
Several forces have contributed to the easing cycle that began in mid-2024. UK CPI inflation returned to within touching distance of the 2% target by mid-2024, removing the MPC's primary justification for holding rates at 5.25%. GDP growth remained sluggish — the UK flirted with technical recession in late 2023 and delivered only modest expansion through 2024 — which increased the economic argument for looser monetary policy.
Global factors also matter for UK mortgage pricing. US Federal Reserve policy affects sterling/dollar dynamics and indirectly influences SONIA swap pricing. When the Fed shifted toward an easing posture in late 2024, UK gilt yields eased alongside US Treasuries, pulling SONIA swaps lower and giving lenders room to reduce fixed-rate pricing. The interconnectedness of global bond markets means that what happens at the Federal Reserve on a Wednesday afternoon in Washington can affect the 5-year fixed rate you are quoted on Thursday morning in Birmingham.
Reading today's rate table through a market lens
With that context in place, the current rate table looks rather different from how it might appear at first glance. When you see a 5-year fix at 4.22% sitting below a 2-year tracker at 4.79%, the gap is not a mystery. The 5-year fix is cheap relative to base rate because it already embeds the anticipated cuts. The tracker looks expensive because it starts at base plus a margin — it hasn't benefited from those cuts yet, and it won't until they arrive.
The decision is therefore about timing and conviction. If you believe cuts will arrive broadly as markets expect, a fix offers slightly cheaper overall cost with certainty baked in. If you believe cuts will arrive faster, deeper, or both, a tracker captures that upside. And if you believe the cutting cycle will stall — perhaps because services inflation remains elevated or a global shock reverses the trajectory — the fix looks the clear winner. You are not making a binary judgment on a single outcome; you are assessing which distribution of outcomes you are willing to accept.
The base rate outlook and what to watch
Several indicators are closely watched by market participants as leading signals for MPC decisions, and therefore for swap rate movements. UK average earnings growth in excess of 4–5% annually is generally viewed as inflationary and supportive of a higher-for-longer base rate. CPI services inflation — which strips out volatile energy and goods prices — has been a particular concern for the MPC and a key datapoint to monitor. Labour market slack, as measured by the unemployment rate and vacancy levels, rounds out the domestic picture.
Externally, European Central Bank decisions and US Fed signals ripple into UK swap markets quickly. Any sign that the global easing cycle is stalling tends to lift SONIA swap rates and therefore fixed mortgage pricing. Conversely, weaker-than-expected global growth data tends to bring swaps lower and give lenders room to cut fixed rates. For borrowers who are actively tracking the market ahead of a remortgage, these are the datapoints worth watching.
A brief note on variable rate products
Beyond fixed rates and trackers, lenders also offer standard variable rate (SVR) products and discount variable mortgages. SVR products are set entirely at the lender's discretion — they are not contractually linked to base rate — and tend to be the most expensive rate a lender charges. Discount mortgages offer a margin below SVR and share the same weakness: they can move without a corresponding base-rate move if the lender chooses to adjust SVR. Neither product is generally recommended as a deliberate choice; they are most often the rate a borrower reverts to when a deal ends and they haven't yet remortgaged.
Pros
- Fixed rates already price in expected cuts, meaning they can look competitive against trackers from day one.
- Tracker rates respond automatically to every MPC cut — no remortgage needed to capture the benefit.
- Understanding swap pricing helps borrowers identify when fixed rates represent unusually good value.
- Falling swap rates mean fixed-rate pricing can improve even before base rate is formally cut.
- Both product types are available across a wide range of LTV bands and income profiles.
Cons
- Fixed rates can look expensive in hindsight if cuts arrive faster than swaps priced.
- Tracker payments rise immediately when base rate rises — no lag or protection.
- SVR reversion rates at deal expiry are almost always significantly higher than the initial rate.
- Swap market expectations can be significantly wrong — as the 2022 mini-Budget demonstrated.
- Short-term swap-rate volatility sometimes causes lenders to withdraw or reprice products within days.
Why market context doesn't make the decision for you
Even with a thorough understanding of swap rates and base-rate cycles, the market context alone does not tell you which product to choose. That depends on your circumstances — your income stability, payment headroom, time horizon and risk tolerance. What the market context does is help you evaluate whether today's pricing looks reasonable, whether a current fixed rate represents good value relative to the cuts that are already expected, and whether a tracker's day-one cost disadvantage is likely to erode quickly given the rate path markets are pricing.
A whole-of-market broker with access to live swap data and the full range of lender pricing is well placed to translate market conditions into a specific recommendation for your mortgage. The information in this article is for general educational purposes only and does not constitute personal financial advice. We are not authorised by the Financial Conduct Authority to make personal mortgage recommendations. Your home may be repossessed if you do not keep up repayments on your mortgage.