What is a mortgage? Bank of England base rate

Discover what the Bank of England base rate is, as well as how it affects you and your mortgage in this video guide.

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Video transcript

[MUSIC] The Bank of England base rate affects a whole host of financial products, from mortgages and savings accounts to pensions. It also affects the value of the pound, relative to other currencies. So it's likely to have a notable impact on your finances. The rate is decided on the first Thursday of the month by the Bank of England's Monetary Policy Committee. It's based on whether the committee thinks levels of spending are too high, or too low to achieve the UK's inflation target of 2%. If they think spending levels are sending the rate of inflation too high, they'll raise the base rate.

If they want to stimulate extra spending, they'll lower it.
So why does this work? The base rate controls how much interest the Bank of England pays banks and building societies, which in turn affects the rates they offer to savers and borrowers. If the base rate is cut, savings rates will drop. Meaning there's less reason for you to keep your money in the bank. Rates on loans and mortgages will drop too though, so there's more incentive for businesses and individuals to borrow and spend.

If the base rate increases, it has the opposite effect.
To find the best rates on savings accounts, ISAs, credit cards and mortgages, visit Which? Money Compare.

What is the Bank of England base rate?

The Bank of England base rate, currently at an all-time low of 0.25%, is the rate of interest that the Bank of England pays on reserve funds held by financial institutions. 

The base rate impacts interest rates elsewhere in the market, in turn influencing levels of saving, lending and borrowing in the UK.

The Bank of England's Monetary Policy Committee has the power to adjust the base rate up or down in order to keep inflation as close as possible to the target of 2%. The committee meets on the first Thursday of every month to discuss this. 

Until August 2016 the base rate had been 0.5% for seven years, since the height of the financial crisis in 2009. On 4 August 2016 the base rate dropped to a new low of 0.25%, following a unanimous vote from the Monetary Policy Committee.

  • The vote to drop the base rate was prompted by financial instability in the wake of the UK's vote to leave the EU. See all the latest news, advice and analysis on our Brexit hub

How does the base rate affect me?

The base rate has a direct impact on the interest rates offered on financial products, including mortgages and savings accounts. 

If the Monetary Policy Committee wants to stimulate borrowing and spending by consumers and businesses, it will lower the base rate, making borrowing cheaper and saving less appealing.

If spending levels are getting too high and there's a risk of inflation soaring out of control, the Bank of England will raise the base rate. This usually leads to better savings rates but more expensive borrowing.

As the base rate is currently at a record low, mortgage rates are also lower than ever before. However, it's also harder than ever to get a decent return on your savings.  

The base rate also tends to affect the value of the British pound relative to other currencies. Lower interest rates in the UK makes the pound less attractive to foreign investors, which results in the exchange rate dropping.  

The Bank of England base rate and mortgages

The interest rate on tracker mortgages tracks the Bank of England base rate at a set margin above or below it. If the base rate moves up or down, the rate you pay on your tracker mortgage immediately shifts in line with the changes.

The standard variable rate (SVR) offered by mortgage lenders is also likely to shift as a result of a base rate change, although any changes that do occur don't tend to be immediate. 

Generally speaking, if you think the base rate is likely to remain low for some time, a tracker mortgage could be your best option. If you believe that the base rate is likely to rise in the near future, you're better off opting for a fixed-rate mortgage.

However, the future direction of interest rates can be very difficult to predict so we'd always recommend talking to an impartial mortgage broker to get advice based on your personal circumstances. 

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Last updated:

July 2016

Updated by:

Joe Elvin

Your home may be repossessed if you do not keep up repayments on your mortgage.

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