Why UK mortgage rates are falling: swap rates’ direct impact

You’ve no doubt seen the headlines: fixed mortgage rates are falling. Lenders have begun cutting the cost of their 2-year and 5-year deals. The “best buys” on offer are getting cheaper week by week. But the question most people don’t ask (but probably should) is: “Why? Isn’t there a rate war on?”

The Bank of England has held the base rate of borrowing at 3.75% since December 2025. So what’s driving these cuts to interest rates now, then?

In short, swap rates. Understanding them gives you a genuine edge in deciding when and how to act on your mortgage. Here’s the deal…

First, what is a swap rate?

Here’s the short version. When a lender offers you a fixed-rate mortgage, they’re taking on a risk. They lock in your fixed rate for the agreed term, but the cost of funding that money can change. To protect themselves, lenders use financial agreements called interest rate swaps.

In a swap, the lender pays a variable rate to a financial institution. In return, they receive a fixed rate, i.e. the swap rate. They then pass that fixed rate on to you, adding a margin to cover their costs and profit. So the swap rate is, in effect, the lender’s wholesale cost of your fixed deal.

What this means in practical terms: when swap rates fall, lenders’ funding costs fall. Which means they can cut mortgage rates and still make money. When swap rates rise, the opposite happens, sometimes within days. Concurrent swap rate rises are why we’ve seen rates rise this year, at least up till now.

The key benchmark: SONIA

In the UK, when SONIA swap rates move, so does fixed-rate mortgage pricing. This index replaced LIBOR as the UK’s main interest rate benchmark in 2021.

You’ll hear about 2- and 5-year SONIA swap rates most often in mortgage rate discussions. Why? because:

• 2-year SONIA swaps are the primary driver of 2-year fixed mortgage pricing
• 5-year SONIA swaps are the primary driver of 5-year fixed mortgage pricing

These rates move with financial markets. Specifically, they shift with investors’ collective expectations for interest rates and inflation. If markets expect rates to stay high for longer, swap rates rise. If markets expect cuts, swaps fall. Fixed mortgage rates follow, usually within days, but sometimes even faster.

These fluctuations are why fixed mortgage rates can move even with a stagnant base rate. They’re responding to a different signal than the one the public generally sees.

Where swap rates stand right now

Swap rates spiked in March 2026, triggered by the war in Iran. They surged, pulling fixed mortgage rates higher in tandem with them.

Since then, the picture has been changing. Tensions have partially eased, and markets have reassessed the inflation outlook. As a result, SONIA swaps have been on a stable-to-gently-falling trend through May, into June.

In February 2026, before the Iran conflict, 2-year SONIA swaps stood at around 3.42%. 5-year swaps were available at around 3.66%.

After the March spike, both moved higher. Yes, they’ve since pulled back from their peaks. But they still remain elevated relative to the pre-conflict position.

The practical effect is that lenders have been cutting fixed rates week by week. Moneyfacts data from 5 June shows:

• Average 2-year fix: 5.65% (down 3 basis points on the week)
• Average 3-year fix: 5.38% (down 3 basis points on the week)
• Average 5-year fix: 5.61% (down 2 basis points on the week)

Fourteen lenders cut fixed rates in the same week. Amongst them were Halifax, Lloyds, HSBC, NatWest, Barclays and Santander. Only one lender made a significant increase in the same period.

Among higher loan-to-value products, some cuts have been even steeper. The reason? Lenders are competing hard for first-time buyers’ business.

Why swap rates matter more than the base rate right now

In April, the Bank of England held the base rate at 3.75%. The next MPC decision falls on 18 June. What can we expect?

Well, let’s not forget the economic impact of the war in Iran. Plus, inflation stands at 3%. That backdrop has deeply divided forecasters’ predictions on which way the MPC will jump.

But here’s the thing. Whatever happens on 18 June won’t directly move your fixed mortgage rate. As we’ve said, your fixed rate moves with swap markets. And those markets are already doing something interesting.

Swap rates could fall further if the global picture continues to stabilise. If oil prices moderated, for example. Or if inflation expectations soften due to a (partial) conclusion of a major global conflict. Fixed mortgage deals would soon follow.

Conversely, the opposite is true. Say the conflict escalates. Or inflation proves stickier than hoped. Then, swaps could spike again, and the window of cheaper deals could close fast.

These different scenarios form the environment we’re all navigating. It rewards action, not inaction.

House prices and their impact on buying/remortgaging decisions

Interest rates don’t work in isolation. Halifax data (May 2026) shows UK house prices dropping 0.1% for the second consecutive month.

Additionally, the average house price stands at £298,806. This price reflects an annual growth of just 0.5%. Nationwide, in contrast, reported a 0.6% monthly dip.

For buyers, this is genuinely significant. Sellers are more willing to negotiate. Stock levels have improved. And new 90–95% LTV mortgages are coming to market as lenders compete for first-time buyers.

We know many people have been waiting for a moment where rates and prices both give you room to manoeuvre. Make no mistake, this is closer to that moment than we’ve been for months.

How contractors should run with these changes in the market

Swap rates are easing. Fixed deals are improving. House prices are softening. The Bank base rate is holding. That’s four positive markers pushing in the same direction at the same time.

But you have to realise that this window could shift overnight. Swap markets move quickly. If inflation nudges upwards, or if the conflict intensifies, the mood can change within weeks. You need to make this work for you, now. And you can, but still keep the flexibility to benefit if things improve further.

That’s where our Rate Monitoring Service comes in for those waiting to remortgage. We lock in the best deal available to you today, up to six months before your current deal ends. If rates improve before your deadline, we’ll move you to the better deal. If they rise, no problem. The rate you lock in today protects you from further increases. Either way, you win.

And as a contractor, we can offer you something most high street lenders won’t. We’ll assess your affordability based on your contract rate. We don’t use payslips. We don’t need your accounts.

We have over 30 lenders who understand how contractors work, including their payment structures. We’ll find the most suitable deal for your circumstances to futureproof your next rate. You simply won’t get that opportunity on the High Street!