How does mortgage lender funding affect your mortgage price?

Published 9 August 2023

Updated 5 November 2026

Historical explainer: the figures and product examples below relate to 2022, not current mortgage rates.

Mortgage Lenders can fund their mortgage lending in several ways. The main funding methods are:

• Customers Savings
• Government Funding Schemes
• Wholesale Markets

On top of charging a margin, lenders deciding what to charge also have to consider the cost of regulation, such as capital and liquidity requirements, default rates, administration, marketing expenses and SWAP rates.

• Customer Savings - A bank may offer people with savings a return on their money. They will add a percentage to this and lend it to Mortgage Borrowers, the Bank making their money on the difference between the two rates.
• Government Funding Schemes - Time-to-Time the Government will want to incentivise the banks to lend to certain types of borrowers. First Time Buyers are often the target of the UK Government, having schemes such as Help-to-Buy, which almost bypasses banks or other schemes such as the Mortgage Guarantee Scheme insuring banks.
• Wholesale Markets - Wholesale funding uses deposits and other liabilities from institutions such as the Bank of England, banks, pension funds, money market mutual funds and other financial intermediaries.

SWAP Rates

While a move in the Bank of England base rate is one event that could lead to changes in mortgage pricing, lenders regularly vary the rates they offer to the market and can move up or down.

The cost of borrowing in the 'Wholesale Market' is variable. The rates can go up and down. Banks need to insure against that fluctuation to offer you a fixed-rate mortgage. Lenders use swap rates, whereas the name suggests - two different parties swap interest rates. That means the price of a fixed-rate mortgage is based on the price at which they can insure themselves in the SWAP market. 

By September 2022, the Bank Base Rate had increased by 2.15 percentage points over the previous year, from 0.10% to 2.25%. Two-year swap rates had increased by 5.12 percentage points (from 0.44% to 5.56% as of 26 September 2022).

At the time, swap rates reflected expectations that Bank Rate would continue to rise, affecting what fixed rates mortgage lenders could offer.

An Example of Pricing

( Quoted rates correct as of 11 October 2022)

The Bank Base Rate was at 2.25%, but The Mortgage Works (TMW) charged 5.14% (with a 3% fee) for a vanilla 2-Year Fixed 75% LTV Remortgage. Why?

You would think Lenders were making fantastic profits. They were charging almost double the Bank of England Base Rate.

Though that was not (exactly) the case. Mortgage Lenders needed to insure themselves. Think of the Bank of England Base Rate as a Tracker, and Lenders wanted to offer you a Fixed Rate Mortgage.

To guarantee they profit and not lend you money that is profitable today but perhaps not next month. Lenders have to insure themselves with SWAP rates.

The SWAP market does take into account the Bank of England Base Rate. Though it's what the speculators *think* it will peak to in the future in 1 or 2 years.

The SONIA 2-Year SWAP rates were around 5% at the time, though volatile.

This is why Tracker Mortgages remained in the market when many mortgage lenders pulled their Fixed Rate Mortgages. It's also the oddity of why sometimes 5-Year Fixes are cheaper than 2-Year Fixes.

This is a simplified explanation, but I hope it helps explain the high rates lenders were offering in 2022.

Why did mortgage rates increase while savings rates lagged in 2022?

The rate of return for savings increased slightly, with The Times reporting, "Interest rates rise to 2.25%" on 27 September. The study said that only 26 easy access accounts (11.2%) had seen any increase in the rate paid following the 4 August Bank Base Rate rise. Sometimes banks will wait a while before making changes to savings rates – it may be several weeks or even longer. Though competition or lack of competition, including consumer apathy for searching for a better deal, many do not get around to switching.

Unfortunately, even if the latest increase was passed on in full, rising inflation – then 9.4% and expected to go higher – eroded the value of people's nest-egg cash.

In addition, Savings Rates did not increase to the extent of the Fixed Rate Mortgages discussed above. The cost of borrowing did not always drive those Mortgage Costs; swap rates also mattered.