When the Bank of England's Monetary Policy Committee announces its interest rate decision this week, the script is already written. The base rate will almost certainly remain at 3.75%, marking the fifth hold in a row. For many homeowners, this sounds like good news. The reality is more complicated.
Here's the puzzle: if the base rate isn't changing, why are mortgage lenders already hiking the rates on new fixed-rate deals? That's exactly what's happening right now, and understanding why matters if you're planning to remortgage or buy soon.
Why lenders are moving faster than the Bank of England
The base rate and the rate your lender charges you for a mortgage are not the same thing. The base rate is the Bank of England's tool for managing inflation, which currently sits at 2.6% in the year to June. That's still above the 2% target, which is why the committee has adopted a cautious stance.
But lenders don't set their rates based solely on the base rate. They also factor in their own funding costs, and those costs are rising. Recent volatility in the Middle East has spooked financial markets. The impact is real and immediate. When wholesale funding becomes more expensive or harder to access, lenders pass that cost on to borrowers by raising the rates on new mortgage deals.
The average rate on a new two-year fixed mortgage has now climbed to 5.62%, the highest level seen in over a month. This happens independently of what the Bank of England does. A base rate hold doesn't insulate you from rising lender margins.
Fixed rates versus tracker mortgages: who feels the impact?
There's an important distinction here. If you're on a tracker mortgage, a base rate hold means your monthly repayment stays the same. That's straightforward.
But more than eight in ten UK mortgage customers have fixed-rate deals. For them, the base rate decision is almost irrelevant. Their rate won't budge until their current deal expires, which typically happens after two or five years. When that time comes, they'll remortgage onto a new deal at whatever rate the market is offering then.
The current environment is creating a peculiar tension. The base rate is at its lowest level since February 2023, and it's expected to remain steady. Yet lenders are pricing new fixed deals as if they're bracing for tougher times ahead. That's a signal worth paying attention to.
What does this mean for you right now?
If you're thinking about remortgaging or buying within the next few months, the timing matters. Lenders move in tandem, so if one is raising rates, others tend to follow. The window for locking in current rates closes quickly once the trend starts.
For those mid-term who won't need to remortgage for a couple of years, there's less urgency. But geopolitical uncertainty isn't going away, and inflation is expected to rise slightly in July when energy price increases take effect. The MPC will be watching those numbers carefully. Most analysts don't predict any change to the base rate in the near term, but the possibility of a future rise isn't off the table.
The disconnect between what the Bank of England does and what lenders charge you is a reminder that base rate decisions are only part of the borrowing puzzle. Lenders are independent operators responding to their own pressures and market conditions.
The practical takeaway
A base rate hold brings a measure of stability, which matters psychologically after a period of persistent rate rises. But stability at the base doesn't mean stability across the mortgage market. If you're considering a remortgage or new purchase, check what deals are available now rather than assuming things will get cheaper if you wait.
The economic environment is uncertain, and lenders are pricing that uncertainty into their products. Whether that caution proves justified or not, the rates on offer today may look attractive in a few months' time.