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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 rises - plus calculate how much your monthly payments might increase.

In this article
Video: what is the Bank of England base rate? What is the current base rate? How does the Bank of England base rate work? Why does the Bank of England base rate change?
What does a rate change mean for you? How will the base rate impact on my mortgage? Base rate calculator: will my mortgage payments increase? Get personal advice on the best mortgage for you

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?

The current Bank of England base rate is 0.75%, and has been since 2 August 2018. This is the highest it's been in nine years.

Before August, 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%.

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.

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Why does the Bank of England base rate change?

The Bank of England base rate is voted on by the Monetary Policy Committee (MPC), which meets on the first Thursday of every month.

The MPC has the power to adjust the base rate up or down. Its decision is based on current economic circumstances, with the MPC aiming keep inflation at 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 increase the base rate.

What does a 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. Similarly, a higher base rate is good news for savers, who will earn better returns.

The current low base rate means that some mortgage deals are at historically cheap levels, but interest rates on savings accounts have also dropped.

How will the base rate impact on my mortgage?

If you’re on a variable rate mortgage, a base rate change - or 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 +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 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.

With the average SVR at 4.72%, it pays to remortgage onto another deal before the end of your fixed-term.

Discount mortgages

Discount mortgages offer a cut 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 are a temporary safe haven from rate rises, 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 for a period to guard against upcoming rises.

But be aware that deals might get more expensive if banks are expecting a rate rise in the near future. So if you’re looking for a fixed rate deal, it’s wise to act before rates begin to creep up.

Base rate calculator: will my mortgage payments increase?

There's no way to predict exactly how much your lender may increase your rate on the back of an interest rate rise. But you can use our base rate calculator to see how your payments might go up if your lender raises your rate.

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: 2.60% (average of all variable rate mortgages on 16 October 2017)
  • Mortgage term: 20 years
 
Base rate increase of 0.25%
Mortgage balance Monthly increase Annual increase
£100,000 £12.33 £147.96
£150,000 £18.50 £222
£200,000 £24.66 £295.92
£250,000 £30.83 £390.96

 

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
£100,000 £24.83 £279.96
£150,000 £37.25 £447
£200,000 £49.65 £595.80
£250,000 £62.07 £744.84

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Correct as of date of publication.


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