The Bank of England base rate can affect how much interest you pay on your mortgage. Here’s how it works.
The Bank of England base rate influences the interest rates that lenders charge. It’s also known as the ‘bank rate’ or the ‘Bank of England interest rate’.
Changes in the bank rate could affect your mortgage. Let's take a look at the base rate and what it means for your mortgage.
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The Bank of England base rate is currently: 0.1%
The bank rate was cut in March this year to 0.1%. Just a week before that it was cut to 0.25%.
Before the recent cuts it sat at 0.75% and had been at this level since August 2018.
The recent drop meant lower interest payments, helping people and businesses if they needed to borrow money during the pandemic.
The Bank of England base rate is currently: 0.25%
The bank rate was raised in November 2021 to 0.25%. It could rise to 0.75% in 2022 bringing it back to pre pandemic levels.
The recent rise could mean interest payments increase on certain types of mortgages and loans.
What is interest?
Interest is a percentage of what you borrow or earn on your savings.
When you take out a loan, you pay the amount you borrow back, plus a percentage of the amount your borrowed – this is interest.
When you save money with a bank, your money will earn a percentage of the amount you have saved. This is also interest.
One factor that influences the amount of interest you pay or receive is the Bank of England base rate.
What is the Bank of England base rate?
The Bank of England oversees money and financial services in the UK. It makes sure that:
Bank notes are secure
Goods and services remain at a stable price
Banks are safe and will look after your money
The financial system is in a good shape.
When a lender or bank borrows money from the Bank of England, they pay interest. The amount of interest they pay is set by the bank rate.
This also influences the interest that banks or lenders charge if you borrow money.
And the bank rate affects the amount you gain in interest on your savings.
Why does the Bank of England base rate change?
The bank rate is based on economic circumstances and UK spending.
If people are spending money too quickly, the bank rate will increase.
If people aren’t spending enough money, the bank rate will decrease, encouraging people to buy or borrow.
The aim of the bank rate is to prevent inflation – this is how much goods cost compared to one year ago.
The government set the inflation rate at 2%, and it’s the Bank of England’s job to make sure we don’t exceed that.
Who sets the Bank of England base rate?
The Monetary Policy Committee (MPC) decides on the bank rate. Their aim is to keep inflation at a minimum.
When does the Bank of England base rate change?
The MPC votes on the bank rate eight times a year.
But they can make unscheduled changes to the bank rate. For example, in March it was reduced to 0.1% to help people and businesses that needed to borrow during the coronavirus pandemic.
What impact does the Bank of England base rate have on me?
This depends on whether the bank rate rises or falls.
If the bank rate is low, it’s good for borrowers because it means they may benefit from lower interest rates.
If it’s high, then savers benefit as they get more return on their savings.
Now, interest rates aren’t great for savers as the bank rate is low.
It’s important to remember that the bank rate isn’t the only thing that influences the interest rate on a loan.
What impact does the Bank of England base rate have on mortgages?
Now the base rate is low, so if you’re thinking of getting a mortgage you might benefit from lower interest rates.
You may find changes in the bank rate affect the following mortgages:
A tracker mortgage ‘tracks’ against the bank rate and charges interest accordingly. For example, if the bank rate goes up then it’s likely your mortgage payments will too.
But the same applies if the bank rate drops. If this happens you might benefit from lower payments.
Standard Variable Rate (SVR) mortgages
You’ll usually be put on to an SVR mortgage after your fixed-interest period ends.
You’ll pay your lender’s rate of interest, which will be influenced by the base rate and other factors.
If you’re coming to the end of your fixed-rate deal, it could be worth remortgaging, rather automatically going on the SVR mortgage – you might save some money.
This is a discount on the lender’s SVR mortgage, for example, the SVR mortgage minus 1%. You’ll get this discount for between two and five years.
A bank rate increase could mean an increase in your interest payments, so any discount may not be beneficial.
Fixed rate mortgages
Fixed rate refers to your interest rate. With a fixed rate mortgage, you should be protected against any changes to the bank rate.
The downside is, if the bank rate drops, you won’t save anything.
You’re only on a fixed rate mortgage for a certain period though. When the term ends, it’s worth looking into remortgaging. If you'd like to know more about interest rates, our guide to APRC could help.
READ MORE: Tracker mortgages explained