For years, mortgage pricing seemed simple: the Bank of England moved rates, and lenders followed.
In 2025, that relationship has broken down — not because lenders have stopped paying attention to policy, but because
competition and
margin compression have become just as important as monetary policy itself.
The quiet story shaping this year’s market isn’t the base rate. It’s the
fight for volume.
Banks, building societies, and specialist lenders are competing harder than at any point since 2008. Yet at the same time, their cost of funds remains elevated, and their risk margins are being squeezed. The result is a strange paradox: mortgage rates that look generous compared to funding costs — and volatility that keeps borrowers guessing.
To understand where pricing goes next, you need to understand how lender competition works beneath the surface — and what margin compression really means for borrowers.
What Margin Compression Actually Is
Margin compression occurs when lenders reduce the gap between their
cost of funds and the
rate charged to borrowers in order to stay competitive.
In plain terms, they’re earning less per loan.
This can happen for a few reasons:
- Market share targets push lenders to price more aggressively.
- Borrowing demand weakens, forcing rate cuts to attract volume.
- Funding costs stabilise, but competition drives pricing lower than sustainable levels.
In 2025, all three are happening at once. The market has become a battleground for limited business, and margins — particularly on high-quality borrowers — are thinning fast.
The New Phase of the Mortgage Price War
By mid-2025, lenders were sitting on large liquidity buffers built during the high-rate environment of 2023–2024. At the same time, origination volumes had slowed dramatically.
To maintain lending targets, institutions began lowering margins, often below what was justified by swap rate movements.
That’s why in early summer, even as five-year swap rates briefly rose, fixed mortgage pricing continued to edge down. Lenders were effectively absorbing the extra cost to win applications.
This is what’s known as
margin compression — sacrificing short-term profitability to maintain presence in a shrinking market.
The effect on borrowers? Short windows of unexpectedly cheap deals — but also a higher risk of repricing once the competition phase eases.
Our earlier article,
How Lenders’ Swap Rates Set Tomorrow’s Pricing, explains the mechanics behind this divergence between wholesale funding and retail pricing.
How Competition Creates Volatility
Lender competition benefits borrowers — until it doesn’t.
When multiple banks undercut one another, it can trigger a
race to the bottom, where pricing no longer reflects true cost. That’s great for short-term affordability but unsustainable over time.
Eventually, one of two things happens:
- Margins become too thin to maintain, and lenders
reprice upwards abruptly.
- New data — such as sticky inflation or higher swaps — tips the market back toward caution.
These shifts are why mortgage rates can move sharply from one week to the next without any policy change.
Borrowers who act during periods of heavy competition — before lenders pull back — tend to secure the best results.
That’s why timing has become as critical as rate selection.
The Hidden Risks of Margin Compression
When lenders operate with ultra-thin margins, they become more sensitive to market shocks. A 0.10% move in swap rates can suddenly make a product unprofitable.
That’s why we’re seeing more
mid-application repricing in 2025 — lenders reacting quickly to protect their narrow spreads.
Borrowers might view these changes as arbitrary, but they’re the logical result of a compressed environment where even small funding fluctuations matter.
For example, a lender offering 4.69% on a five-year fix while funding at 4.35% has just 0.34% gross margin. If swaps rise 0.15%, that margin is halved — forcing an immediate reprice.
Understanding this fragility helps borrowers act faster, rather than waiting for “just a little lower.”
Private Banks and the Quiet Competition at the Top
Competition isn’t limited to mainstream lenders. Private banks are increasingly competing for prime clients, offering
low-rate, high-value loans as entry points for broader wealth relationships.
For borrowers with significant assets or offshore income, this dynamic has created opportunities unseen in years. Some private institutions are now offering rates close to mainstream levels — effectively compressing the premium that once separated them from retail banks.
This evolution is reshaping the high-end market, aligning with trends we discussed in
Private Bank Mortgages Explained: Benefits and Drawbacks.
How Margin Compression Shapes Borrower Strategy
For borrowers, margin compression creates both opportunity and risk.
The opportunity lies in
catching the cycle early — acting while competition is fierce and before the inevitable correction. The risk lies in waiting too long, assuming lenders will continue discounting indefinitely.
Once liquidity targets are met or swap volatility returns, pricing typically resets higher.
That’s why 2025 has become a year where strategy matters more than speculation. Knowing when lenders are fighting hardest for volume is worth more than trying to predict the next MPC decision.
Why Lender Behaviour Is Now Diverging
Not every lender reacts the same way to competition.
Some — particularly smaller building societies or challenger banks — price more aggressively to capture visibility, then retreat quickly once pipelines fill. Others, with larger balance sheets, can sustain tighter margins longer.
This divergence means borrowers can’t assume all lenders move in sync. A 4.59% five-year fix from one institution may disappear while another holds steady.
At
Willow Private Finance, we monitor these cycles daily — tracking not just swap rates but also individual lenders’ funding behaviours. That’s how we position clients ahead of repricing waves rather than behind them.
When Margin Compression Ends
Eventually, competition finds its limit.
Once lenders’ profitability falls below threshold, pricing reverts to equilibrium. Historically, these moments are marked by sudden, sharp repricing — often catching borrowers off guard.
For instance, in late 2025, a two-week period of low inflation data and swap stability saw lenders slash rates aggressively. Within a fortnight, those same lenders had reversed half the cuts after new U.S. inflation data sent bond yields higher.
The lesson? Margin compression creates temporary distortions — not permanent discounts.
Borrowers who treat low-rate periods as windows, not trends, are the ones who gain most.
How Willow Private Finance Can Help
At
Willow Private Finance, we help clients navigate the interplay between
competition, timing, and risk.
Our analysts monitor daily movements in swaps, lender pipelines, and product withdrawals across the market.
This allows us to:
- Identify short-term “sweet spots” before repricing cycles begin.
- Match client profiles with lenders most likely to undercut for their demographic.
- Secure competitive private and specialist bank offers unavailable through standard channels.
- Advise strategically on when to lock or wait — based on data, not headlines.
Our approach isn’t speculative. It’s structural.
We interpret what lenders must do next, not what they say they’ll do.
Frequently Asked Questions
1) What is margin compression in mortgage lending?
It’s when lenders reduce the gap between their funding costs and borrower rates to stay competitive. Essentially, they make less profit per loan.
2) Why does competition lower mortgage rates temporarily?
When demand slows, lenders cut pricing to maintain lending volumes. But once targets are met or funding costs rise, they usually reprice upward.
3) How does margin compression affect borrowers?
It creates short-lived opportunities for cheaper deals, but also increases volatility — lenders can withdraw products quickly when margins tighten too far.
4) Why do private banks compete on rate if they serve wealthier clients?
Private banks often use low-margin mortgages as relationship-building tools for high-net-worth clients, narrowing the gap between private and retail pricing.
5) How can Willow Private Finance help?
Willow tracks lender competition and swap rate shifts daily, helping clients secure market-leading rates during brief windows before repricing cycles reverse.
📞 Want Help Navigating Today’s Market?
Book a free strategy call with one of our mortgage specialists.
We’ll help you find the smartest way forward — whether rates are falling, flattening, or firming.

