The Bank of England opted to keep interest rates on hold this month but with the UK economy expected to flatline mortgage lenders may still have to charge borrowers more.

Banks and building societies also use interest rate swaps – a money market mechanism – to decide how much they are going to charge mortgages borrowers.

So while interest rates – also known as the Bank Rate, may be on hold swap rates will often be determined by how well the economy is expected to grow.

Nicholas Mendes, mortgage expert at John Charcol said swap rates are used by lender to price fixed-rate mortgages and manage risk.

He said: “Swap rates reflect the cost for lenders to borrow money over the term of a mortgage and indicate market expectations for future interest rates. If swap rates rise—perhaps due to an expectation of fewer rate cuts—mortgage rates often follow suit, even when the Bank Rate is reduced.”

Mendes said stable market conditions will be essential if the Bank of England is to reduce rates and for swap rates to stablise or go down.

He said: “This includes inflation remaining consistently below the Bank of England’s 2% target. A settled economic environment would encourage lenders to offer more competitive rates. Additionally, global economic factors such as energy prices and supply chain stability could also influence mortgage rate trends.

A fixed rate mortgage means your monthly repayment will be set at the same amount for a fixed rate of time. You can fix your mortgage repayments for two, three, five and ten years. Some mortgage lenders offer longer fixed rate periods.

If you fix your mortgage rate then it will not change during that time. If you decide to remortgage or pay your mortgage off before the fixed rate period ends you may have to pay an exit fee known as an early redemption charge.

The interest rate you pay will depend on the Bank of England base rate, which is set each month. The base rate is used by the UK Government to control inflation, if inflation is too high then interest rates are raised to slow down borrowing. If economic growth needs boosting then interest rates are lowered to encourage more lending and therefore more spending. Find out how fixed rate mortgages work, what they cost and how to compare them.

Fixed rate mortgages are a type of mortgage where the interest rate stays the same during the fixed rate, or ‘deal’ period; fixed rate mortgages come in two. three, five, 10 and sometimes longer periods.

How are fixed rates decided?

One reason some people opt for fixed rate mortgages is because they believe the Bank of England is likely to raise rates; if you have a fixed rate then your interest rate won’t be affected if the Bank of England interest rate changes.

If you have a variable rate mortgage then your mortgage repayments will change when the Bank of England raises or lowers its base rate. Mortgage lenders have their own standard variable rate (SVR) which is fixed slightly above the Bank of England’s base rate. An SVR mortgage means you are borrowing on your lender’s variable rate, which can change when the Bank of England changes its base rate.

How do fixed rate mortgages work?

When you apply for a mortgage you will be asked whether you want to fix your interest rate, or whether you are happy to opt for a variable rate. Fixing your interest rate could work out to be a cheaper option if it looks like bank rates are going to rise.

If you think they are going to fall, then you may prefer a variable rate mortgage as a fixed rate mortgage will tie you into the mortgage rate for the term of the fix. The most popular type of fixed rate tends to be a two or three year fix, as these mean you have more flexibility, a 10 year fixed rate can offer stability but it can work more expensive than fixing your mortgage rate for two years as lenders will price in the cost of having to fix that rate for a longer term.

Once you choose your fixed rate term you’ll be given an idea of what your repayments will be. When you get your final mortgage offer, you will be given a monthly repayment schedule by your mortgage lender and your repayments will be set at that exact amount for the period of the fix.

If you decide to remortgage, or find yourself able to afford to pay off your mortgage before the term comes up you will have to pay an early exit or early redemption fee.