The Bank of England Base Rate: how it affects you
What does a rise in the base rate mean for your finances?
You’ve probably heard the base rate or Bank of England rate referred to in the news, but how does what happens to the base rate affect your savings or mortgage?
Base rate basics
The Bank of England Base Rate – often just called the base rate or bank rate – is the official interest rate that’s set by the Bank of England’s Monetary Policy Committee. They meet eight times a year (roughly every six weeks) and decide whether to raise or lower the base rate, or to leave it where it is.
The base rate is important because it’s the interest rate the Bank of England will charge to lend money to commercial banks. It’s also used as a benchmark rate for banks when they lend to businesses and individuals.
Although it’s currently at historically low levels, it did almost reach 15% in 1989 – which anyone who had a mortgage at the time will definitely remember!
How rates can change
When the Bank of England changes the base rate, it can affect some mortgage and savings products straight away, but others are unaffected. And banks can change rates on some accounts by more – or less – than the Bank of England rate.
There are different types of mortgages available, and depending on which one you have you will be affected in different ways:
- Fixed rate mortgages – the interest rate on fixed rate mortgages can’t change for the duration of the deal, so you’re not affected if you have one of these.
- Standard variable rate (SVR) mortgages – with an SVR or discounted rate mortgage, your mortgage lender has more leeway. They can change the interest rate by more – or less – than the base rate changes by. Or they can leave it where it is. And if they do change the SVR, it doesn’t have to be done straight away.
- Tracker rate mortgages – if you have a tracker rate mortgage, the interest rate you pay has to rise or fall by the same amount that the base rate changes by. The ‘tracker’ bit of their name refers to the fact they track the movement in the Bank of England rate. Some lenders change the interest rate on their tracker mortgages the same day as the base rate, others wait until the start of the following month.
As with mortgages, you can get fixed rate, variable rate or tracker rate products, although tracker rate savings accounts are quite rare.
- Fixed rate savings accounts – the interest rate can’t change for the duration of the term.
- Variable rate savings – the bank or building society can change the interest rate by more or less than the Bank of England changes the base rate by – or leave it unchanged. Over the last few years, banks have increasingly reduced the interest rate on variable rate savings accounts, even when the Bank of England has left the base rate unchanged. Not all banks do this, but it’s one reason why it’s worth checking the interest rate of your variable rate savings account regularly.
- Tracker rate savings – the interest rate has to rise and fall in line with base rate changes.
Your bank should tell you if the interest rate on your savings is changing. And if you want to switch, I always think it’s worth waiting for a few weeks after any change in the base rate. That way you avoid the potential problem of switching to an account only to find the rate drops!
What you can do
It’s always hard (OK, pretty much impossible!) to predict when interest rates may change. But you can stay one step ahead by working out how much any increase interest rates might cost you, if you have a mortgage. As a rough guide, on a £200,000 repayment mortgage over 25 years, every 0.25% rise would cost roughly an extra £25 a month. If you can’t afford anything other than the smallest rise in interest rates, it may be worth switching to a fixed rate for peace of mind.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.