We use cookies to allow us and selected partners to improve your experience and our advertising. By continuing to browse you consent to our use of cookies. You can understand more and change your cookies preferences here.

Bank of England base rate and your mortgage

Find out how the base rate will affect your mortgage payments and what to do if you’re on a tracker, discount or SVR mortgage when the base rate changes

In this article
What is the current base rate? Bank of England base rate: the basics How does the Bank of England base rate work? Why does the Bank of England base rate change?
What does a base rate change mean for you? How will the base rate impact your mortgage? Base rate calculator: will my mortgage payments increase? Will the base rate turn negative?

What is the current base rate?

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 pandemic.

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 2008-2009 financial crisis. Before that, it was much higher at 5%.

Bank of England base rate: the basics

For an at-a-glance look at how the Bank of England base rate works, check out our short video below.

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 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 to keep inflation as close as possible to the target of 2%.

If the MPC feels that 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.

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 should remain cheap, but interest rates on savings accounts will continue to flatline. 

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).

Tracker mortgages

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 plus 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.

SVR mortgages

If you’re on your lender’s 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.

With average SVRs well above 4%, it's important to remortgage to another deal before the end of your fixed term.

Discount mortgages

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

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.

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 2.5% (average rate on tracker mortgages in spring 2021)
  • Mortgage term 20 years.
 
Base rate increase of 0.25%
Mortgage balance Monthly increase Annual increase
£100,000 £12.27 £147.24
£150,000 £18.40 £220.80
£200,000 £24.52 £294.24
£250,000 £30.66 £367.92

 

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 0.5%.

 
Base rate increase of 0.5%
Mortgage balance Monthly increase Annual increase
£100,000 £24.70 £296.40
£150,000 £37.85 £444.60
£200,000 £49.39 £592.68
£250,000 £61.73 £740.76

Will the base rate turn negative?

In June 2020, the Bank of England said that it was considering introducing negative interest rates to boost the UK economy after the pandemic.

In February 2021, it warned lenders that they should be ready for negative rates as soon as July 2021. 

There's no guarantee that interest rates will go negative, but if they do, there could be wide-ranging effects.

The biggest issues would be for savers, who could theoretically end up having to pay their bank to hold their cash.

For mortgage holders, the effects would likely be less severe. The vast majority of homeowners have fixed-rate mortgages, which should remain cheap.

Homeowners with variable-rate deals might be excited at the prospect of a drop in their interest rate - but they may end up disappointed. Many banks place 'collars' on their tracker mortgages, which prevent the rate from falling below a certain level, even in the event of a reduction in the base rate. 

×