Why UK mortgage rates are falling… and what swap rates have to do with it

You’ve probably seen the headlines: fixed mortgage rates are falling. Lenders have begun cutting the cost of their 2-year and 5-year deals and the “best buys” on offer are getting cheaper week by week. But the question most people don’t ask (although they probably should) is: why? Isn’t there a war on?

The Bank of England hasn’t moved the base rate since December 2025. So what’s actually driving these cuts? The answer is swap rates. Understanding them gives you a genuine edge in deciding when and how to act on your mortgage.

Firstly, 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: your rate is locked, 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 – the swap rate. They then pass a version of 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 practically: 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.

The key benchmark: SONIA

In the UK, fixed-rate mortgage pricing is primarily tied to SONIA swap rates – SONIA standing for Sterling OverNight Index Average. This replaced LIBOR as the UK’s main interest rate benchmark in 2021.

You’ll hear about two and five-year SONIA swap rates most often in technical discussions around mortgage rates. Why? because:

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

These rates move with financial markets – specifically, with what investors collectively expect to happen to interest rates and inflation. If markets think rates will stay high for longer, swaps rise. If markets expect cuts, swaps fall. Fixed mortgage rates follow – usually within days, sometimes faster.

This is why fixed mortgage rates can move significantly even when the Bank of England doesn’t change the base rate. They’re responding to a different signal.

Where swap rates stand right now

After the sharp upward spike triggered by the Iran war in March 2026 – when swap rates surged and pulled fixed mortgage rates sharply higher – the picture has been changing. SONIA swap rates have been on a stable-to-gently-falling trend through May and into June as tensions partially ease and markets reassess the inflation outlook.

In February 2026, before the conflict, 2-year SONIA swaps were around 3.42% and 5-year swaps around 3.66%. After the March spike, both moved sharply higher. They have since pulled back from their peaks – though they remain elevated relative to the pre-conflict position.

The practical effect: 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 – including Halifax, Lloyds, HSBC, NatWest, Barclays and Santander – with only one making a significant increase. Among higher loan-to-value products, some cuts have been even steeper, as lenders compete hard for first-time buyers.

Why this matters more than the base rate right now

The Bank of England held the base rate at 3.75% in April. The next MPC decision falls on 18 June. In the current environment – with the Iran war’s economic impact still unclear and inflation at 3% – forecasters are deeply divided on what the MPC will do next.

But here’s the thing: whatever happens on 18 June, it won’t directly move your fixed mortgage rate. Your fixed rate moves with swap markets. And those markets are already doing something interesting.

If the global picture continues to stabilise – if oil prices moderate, if inflation expectations soften (for example because of a conclusion, or partial conclusion, to a major global conflict) – swap rates could fall further. Fixed mortgage deals would soon follow. On the other hand, if the conflict escalates or inflation proves stickier than hoped, swaps could spike again, and the window of cheaper deals could close fast.

This is the environment you’re navigating. It rewards action, not waiting.

A note on house prices – and what they add to the picture

The rate environment doesn’t operate in isolation. Halifax data for May 2026 shows UK house prices edging down 0.1% for the second consecutive month – average values at £298,806, with annual growth of just 0.5%. Nationwide reported a 0.6% monthly dip.

For buyers, this is genuinely significant. Sellers are more willing to negotiate. Stock levels have improved. New 90–95% LTV mortgage products are coming to market as lenders compete for first-time buyers. If you’ve been waiting for a moment where rates and prices both give you room to manoeuvre, this is closer to that moment than we’ve been for a while.

What contractors should do with all of this

Here’s our honest assessment. Swap rates are easing. Fixed deals are improving. House prices are softening. The Bank is holding. That’s four things simultaneously pushing in the same direction.

But the window could shift. Swap markets move quickly. If inflation surprises on the upside, or if the conflict intensifies, the mood can change within weeks. The way to make this work is to act now – while retaining the flexibility to benefit if things improve further.

That’s where our Rate Monitoring Service comes in. 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 move you onto the better deal. If they rise, you’re protected on the rate you already secured. Either way, you win.

And as a contractor, you get something most high street lenders won’t offer you: assessment based on your contract rate – not your payslip, and not your accounts. We’ll find the right deal from over 30 lenders who understand how contractors are paid