How lenders put a price on their mortgages

Lenders fund their mortgages in two ways: through retail deposits, that is the money their customers pay in, or through funding bought on the money markets. Those that use retail deposits (building societies have to do so for at least 50% of their lending), have a degree of flexibility. They can increase their fixed rates to put borrowers off and so cut the number of fixed rates deals they sell, or they can reduce them to encourage more people to take them on and win market share.

Where a lender uses the money markets to fund its fixed-rate deals, the pricing is determined by the amount it pays for the money - called the swap rate. Swap rates have priced into them expectations about the base rate. Alastair Pate, director of marketing and strategy, at Kensington Mortgages, explains: "Longer-term money market rates, rather than being linked to the shorter-term base rate, take into account what the economists believe is going to happen to rates." So current fixed-rate prices give us a hint of where the money marketers expect base rates to be in the future.