Video: what is the Bank of England base rate?
The base rate, which is set by the Bank of England, can affect your mortgage - so it pays to understand how it works. This video explains the basics.
What is the current base rate: 0.1%
The current Bank of England base rate is 0.1%. It was cut on 19 March 2020, just a week after being cut to 0.25%. It had been at 0.75% since 2 August 2018.
The Bank of England said the move was to help bolster cash flow for households and small businesses affected by the coronavirus.
- Find out more: coronavirus prompts base rate cut
Before August 2018, it had stood at 0.5% since November 2017. Between August 2016 and November 2017, the base rate was at a historic low of 0.25%.
Prior to that, it spent seven years at 0.5%. It tumbled to this point after the 2008-9 financial crisis. Before that, it was much higher at 5%.
How does the Bank of England base rate work?
When the Bank of England lends money to commercial banks, the banks must pay interest, and the amount is determined by the base rate.
The base rate will also impact on ‘Swap’ rates, the interest rate banks charge when lending to each other. If the base rate rises or falls, lenders often pass these costs on to consumers by raising their own interest rates on loans or savings products.
While that might sound complicated, it essentially means the base rate will impact on two areas of your finances: how much interest you can earn on your savings and how much it costs to borrow money.
Why does the Bank of England base rate change?
The Bank of England base rate is usually voted on by the Monetary Policy Committee (MPC) eight times a year.
However, the committee has the power to make unscheduled changes to the base rate if they think it necessary. The MPC used this power in March 2020, when it reduced the base rate due to the potential effects of the coronavirus on the economy.
The MPC can adjust the base rate up or down. Its decision is based on current economic circumstances, with the MPC aiming keep inflation as close as possible to the target of 2%.
If the MPC feels the economy would benefit from higher borrowing and spending by businesses and consumers, it lowers the base rate.
On the other hand, if spending levels are increasing too quickly and inflation is in danger of soaring, the MPC may raise the base rate.
Prior to the coronavirus crisis, the MPC had been paying close attention to developments around Brexit, which could have a significant impact on the UK economy once the transition period is over.
So far, it has taken what's been called a 'wait and see' approach to Brexit, largely keeping the base rate unchanged from month to month.
- Find out more: what will Brexit mean for interest rates?
What does a base rate change mean for you?
Broadly speaking, a lower base rate is good news for borrowers because the rate of interest they repay is likely to be lower.
A higher base rate is good news for savers, who will earn better returns.
The very low base rate of 0.1% means that some mortgage deals could get cheaper, but interest rates on savings accounts may also drop further.
How will the base rate impact your mortgage?
If you’re on a variable-rate mortgage, a base rate change - or sometimes even speculation that one could be on the horizon - is likely to have an effect on your repayments.
Homeowners on fixed-rate deals, however, won’t feel the effects until their fixed term ends and they’re moved across to their lender’s standard variable rate (SVR).
If you have a tracker mortgage, a change in the base rate will have a significant effect on your monthly payments.
These mortgages ‘track’ the Bank of England base rate plus a set margin - for example, the base rate +1%. Like fixed-rate mortgages, these deals tend to last for a set number of years before reverting to a lender’s SVR.
This means that if the base rate rises by 0.25%, your repayments will too.
In times where the interest rate remains unchanged - for example, between 2009 and 2016 - your interest may stay the same for an extended period.
But in uncertain economic times, your payments may vary as the rate changes, so it’s worth considering whether rate changes are expected in the near future.
If you’re on your lender’s standard variable rate (SVR) - perhaps because your fixed-term deal has ended - then a rate increase could significantly bump up your costs.
While your lender might not increase its SVR by the full amount, it’s still highly likely that your payments will increase.
Since every lender's SVR is above 4.19% (as of August 2019), it pays to remortgage onto another deal before the end of your fixed term.
Discount mortgages offer a discount on the lender’s SVR - for example, the SVR minus 1% - and typically last between two and five years.
As previously explained, a base rate increase might result in lenders pushing up their SVRs, thereby reducing the benefit of your discount deal.
Fixed-rate mortgages provide a temporary safe haven from rate rises as they guarantee a fixed interest rate for a set period of time, but it’s important to be on the ball and switch to a cheaper deal before the end of your fixed term.
At times when the base rate is low, it can pay to fix your mortgage to guard against upcoming rises.
However, if you take out a fixed-rate mortgage and the base rate drops, you won't benefit from reduced payments.
- Find out more: what will Brexit mean for house prices and mortgage rates?
Base rate calculator: will my mortgage payments increase?
The tables below show how much your mortgage repayments could increase if lenders passed on a base rate rise in full.
Based on the following assumptions:
- Interest rate: 3% (average of all variable rate mortgages on 22 July 2019)
- Mortgage term: 20 years
|Base rate increase of 0.25%|
|Mortgage balance||Monthly increase||Annual increase|
Any increase in the base rate is likely to be gradual and staged in increments over the coming years. But when taking out a mortgage, you need to consider how changes in the economy could affect your repayments in the long term.
With this in mind, here’s a rough guide to how your payments could change if interest rates increased by half a percent.
|Base rate increase of 0.50%|
|Mortgage balance||Monthly increase||Annual increase|