Mortgage rates in the United Kingdom are on the rise, even as the Bank of England has held its base interest rate steady at 3.75%. This disconnect is causing confusion and concern for prospective homebuyers and those looking to remortgage. The average two-year fixed mortgage rate climbed to 5.20% in early March 2026, up from 4.78% in January, according to financial data company Moneyfacts. But the increase isn’t directly tied to a change in the Bank of England’s policy; instead, it’s a complex reaction to global economic uncertainty, particularly stemming from the conflict in the Middle East and its impact on financial markets.
The recent escalation of tensions, including airstrikes by the US and Israel in Iran, has sent ripples through the global economy. Stock markets have experienced volatility, and prices for essential goods like petrol and heating oil have increased. These economic shocks are feeding into expectations about future interest rates, and influencing the cost of borrowing for mortgages. The situation highlights a key aspect of how mortgage rates are determined: they aren’t solely dictated by the Bank of England’s base rate, but likewise by what’s happening in the broader financial landscape.
How Swap Rates Influence Mortgage Pricing
Most mortgages in the UK are offered with a fixed interest rate, providing borrowers with certainty over their monthly payments for a set period – typically two, three, or five years. These fixed rates are funded by a combination of savings held in banks and building societies, and money borrowed by lenders on the wholesale markets. This is where “swap rates” come into play. Swaps are financial instruments that banks leverage to manage the risks associated with fluctuating interest rates. Essentially, one bank agrees to pay a fixed interest rate to another, in exchange for receiving a variable rate. This allows lenders to hedge against potential increases in borrowing costs.
Adam French, head of consumer finance at Moneyfacts, explains that lenders don’t directly swap cash, but rather “swap the interest rates on these cashflows… That’s how they manage the risk.” Olly Cheng, senior financial planning director at Rathbones, adds that while fixed rates offer certainty, variable rates could potentially be more advantageous, and swaps allow parties to exchange these risks through a contractual agreement. The swap rate reflects the market’s expectations for future interest rate movements. If investors anticipate higher rates, swap rates will rise, making it more expensive for lenders to borrow money and, to offer competitive mortgage rates.
The Impact of Geopolitical Instability
Prior to the recent conflict in the Middle East, the Bank of England was widely expected to cut interest rates twice in 2026, potentially bringing the base rate down to 3.25%. This expectation was fueled by signs that inflation was beginning to fall. Yet, the outbreak of war has fundamentally altered that outlook. Instead of declining, inflation is now anticipated to rise again, prompting the Bank of England to reconsider its stance and potentially even consider raising rates. The Bank of England held its main interest rate at 3.75% on Thursday, March 14, 2026, as the sharp oil and gas price hikes following the start of the Iran war have stoked renewed concerns about inflation, according to the Associated Press.
Neal Hudson, a housing market analyst at BuiltPlace, emphasizes that swap rates also reflect the level of risk in the economy. “When there is a lot of risk of things changing, as in the economy currently, this is reflected in higher swap rates.” The volatility of swap rates is contributing to a rapid repricing of mortgage deals, with lenders frequently pulling products and offering new rates in response to changing market conditions. French notes that the speed of these changes is unprecedented, with rates shifting much more quickly than in the past.
Looking Ahead: What to Expect for Mortgage Rates
As of last Friday, five-year swap rates had increased to 4.03% from 3.603% on March 2nd, a significant jump, according to Moneyfacts. This indicates that markets are anticipating at least a 0.25 percentage point rise in interest rates over the next five years. While the two-year swap rate hasn’t yet reached the levels seen after the economic turmoil following Liz Truss’s “mini-budget” in 2022 – which saw rates peak at 5.75% (even with a base rate of just 2.25%) and 6.24% in July 2023 – the current situation remains volatile. On Monday, March 18, 2026, the two-year swap rate was just under 4%.
The future trajectory of mortgage rates will largely depend on the duration and intensity of the conflict in the Middle East. If the situation stabilizes and tensions ease, swap rates and mortgage deals could potentially fall. However, if the war continues to escalate and disrupt global supply chains, further increases in borrowing costs are likely. The Bank of England’s next monetary policy meeting, scheduled for May 2026, will be closely watched for any indications of a shift in policy.
Disclaimer: This article provides general information about mortgage rates and economic factors influencing them. It is not financial advice. Consult with a qualified financial advisor before making any decisions about mortgages or other financial products.
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