What are swap rates and why do they matter?
Swap rates reflect expectations for future interest rates and directly affect the interest rates available on fixed rate mortgages
Key takeaways
Swap rates are the interest rates that banks charge each other for borrowing
They affect how much you will pay for a new fixed rate mortgage
Financial institutions use swap rates to manage interest rate risk, and to decide the mortgage rates to charge mortgage borrowers
What are swap rates?
Swap rates aren’t rates that consumers can borrow money at or earn on their savings. Instead, they are rates that affect how much it costs mortgage lenders to borrow. In turn, this affects how much fixed rate mortgages cost.
Swap rates reflect predictions about future interest rate movements. When swap rates rise, it generally becomes more expensive for lenders to borrow, leading them to increase the fixed mortgage interest rates they offer to you. Conversely when swap rates fall, lenders may lower their fixed mortgage rates.
📣 It’s important to note that if you have a fixed rate mortgage, your interest rate will be locked in for a set period of time (e.g. two, three or five years). So changes in swap rates won’t immediately affect you. But they will come into play when you want to remortgage to a new fixed rate deal, as swap rates will influence the deals available.
How do swap rates work?
Swap rates are interest rates mortgage lenders and other financial institutions use behind the scenes.
A swap rate is when two different financial institutions swap interest rates. The term ‘swap rate’ (also known as an ‘interest rate swap’) refers to the rate of interest that a mortgage lender agrees to pay to a financial institution in return for funds. The lender will then use these funds to lend as mortgages to borrowers.
Swap rates are essentially used by financial institutions to hedge their bets against what could happen to interest rates in two, three, five or 10 years, or even longer.
It’s quite technical but when a swap takes place, one financial institution pays a fixed rate and the other a variable rate. In the UK, the variable (or floating) rate, is usually linked to ‘SONIA’ (the Sterling Overnight Index Average). Up until 2021, swap rates were more commonly linked to LIBOR (London Interbank Offered Rate).
If a mortgage lender anticipates rising interest rates, they might enter into a swap where they receive a fixed rate and pay a variable rate, effectively locking in a lower cost of borrowing.
By ‘locking in’, lenders maintain their margins on mortgage lending even if the cost of funds increase – for example, if the Bank of England base rate increases.
What influences swap rates?
Swap rates reflect market expectations of what interest rates are expected to be over the term of the swap rate, e.g. two, five, 10 or 20 years.
These expectations are influenced by factors including:
food prices
fuel prices
the general economy
geopolitical events – e.g. the war in Ukraine
How do swap rates affect mortgages?
When a lender offers a fixed-rate mortgage, it will need to manage its own interest rate risk and ensure it makes a profit on the deal.
The lender can do this by entering into an interest rate swap with another financial institution. This has an impact on borrowers because if swap rates increase, it costs the lender more to manage their risk, and this cost is usually passed on to the borrower in the form of higher mortgage rates.
Swap rates only influence the cost of fixed rate mortgage deals offered by lenders. They don’t impact the cost of variable rate deals or your lender’s standard variable rate (SVR).
What do consumers need to know about swap rates?
Swap rates are not the actual interest rates you see on your mortgage. They are a benchmark used by lenders.
Swap rates are a key factor in determining the interest rates for fixed-rate mortgages. If you are looking for a new fixed rate mortgage and swap rates are high, your mortgage is likely to be offered at a higher rate.
Swap rates can change frequently. If you are looking for a new fixed rate mortgage, a mortgage broker can explain how swap rates affect your specific mortgage options and help you make an informed decision.
What is the difference between interest rates and swap rates?
Swap rates and interest rates are two different things. Interest rates are a direct tool of monetary policy and directly impact the cost of borrowing and how much interest consumers earn on their savings. In contrast, swap rates are used by lenders to price fixed mortgage products.
The following table shows how interest rates and swap rates differ.
Feature | Interest rates | Swap rates |
|---|---|---|
Definition | The cost of borrowing money, typically set by a central bank | The fixed rate exchanged in an interest rate swap contract |
Set by | Central banks (e.g. Bank of England) | Market participants (banks, traders, investors) |
Purpose | Influences borrowing, inflation, and economic activity | Used to hedge or manage interest rate risk and price fixed-rate products (i.e. mortgages) |
Type | Usually a floating rate (e.g. base rate) | Usually a fixed rate |
Used in | Loans, savings, mortgages, credit cards | Derivatives, financial markets, mortgage pricing models |
Influenced by | Changes in monetary policy, inflation, the economy | Market expectations for future interest rates |
Frequency of change | Updated at set intervals (e.g. BofE base rate is normally 8 times a year) | Daily or hourly, based on market conditions |
What is happening to UK swap rates?
UK swap rates have been fluctuating in 2025 due to uncertainty around inflation, economic growth, and future decisions by the Bank of England.
The base rate cuts from 4.75% to 4.50% in February 2025 and 4.50% to 4.25% in May 2025 encouraged swap rates to decline. But sticky inflation triggered pushed swaps upwards in June.
Typically when the markets expect the Bank of England to cut rates, swap rates will usually fall. This means fixed rate mortgages will become cheaper. But if inflation is stubborn or economic data remains strong, swap rates may rise because markets anticipate higher rates for longer.
How often do swap rates change?
Swap rate can change continuously during market hours and you can see live swap rate feeds updating every few seconds.
However, lenders don’t change mortgage prices instantly with each move, but follow sustained trends instead.
Where can I track changes to swap rates?
You can track UK swap rates on several financial data websites, such as:
Bloomberg
Reuters
MarketWatch
Some mortgage brokers also provide swap rate updates.
What does a 5-year swap rate mean?
A 5-year swap rate is the average expectation of interest rates over the next five years.
Mortgage lenders use the 5-year swap rate to help price 5-year fixed-rate mortgages.
If the 5-year swap rate goes up, it means financial markets expect rates to stay higher for longer, making 5-year fixed-rate mortgages more expensive.
Author
Emma Lunn
Personal finance expert
Emma has written about personal finance for almost 20 years, with a career spanning several recessions and their inevitable consequences. Emma’s main focus is helping people learn to manage their...
