When the Bank of England increases the ‘base rate’ many people read the news and wonder what this means for them.
Coverage of the base rate – which is more simply known as ‘the interest rate’ – usually comes loaded with confusing numbers, figures and business jargon.
With mortgage payments usually being the biggest monthly outgoing for homeowners, there is always particular concern about what interest rate rises mean for mortgage payments.
So, what is the ‘base rate’? Why has it risen multiple times this year, the first time that has happened since 2007? What does it all mean for mortgages and are you affected?
What is the Bank of England ‘base rate’?
The Bank of England ‘base rate’ is an interest rate, similar to the ones you see on savings accounts and personal loans. This rate though is paid by banks and lenders – it’s the Bank of England charging the banks interest for holding on to their cash reserves.
The Bank of England calls it ‘the most important interest rate in the UK’ – and you’ll see the media refer to in more general terms, with headlines such as ‘interest rates on the rise’.
Whenever the base rate is changed, those changes will be reflected in the rates that banks and lenders offer their customers. That’s why generally if the base rate goes up it’s seen as good news for savers – as they should get a higher rate of interest on the money they have saved away – but bad news for borrowers – as their rates and monthly repayments will go up.
This isn’t a rule though, and it’s up to banks and lenders to set whatever rates they think are appropriate for their products. Typically after an increase to the base rate mortgage rates will increase much faster than savings rates for example.
What is the base rate for?
The UK government sets the Bank of England the job of stabilising the economy by keeping inflation low. Inflation is calculated by the Office of National Statistics and is a measure of the cost of living according to the change in price of goods and services over time.
Low inflation means prices are stable enough for both consumers and businesses to make financial plans with certainty. High inflation causes uncertainty and can often be seen during challenging times, such as the global financial crisis in 2009 or when the COVID pandemic first began in 2020.
In order to meet government targets and keep inflation low, the Bank of England uses a range of measures – one of which is adjusting the base rate. If spending is high and the rate of inflation is increasing, then the Bank of England can raise the base rate to make borrowing more expensive and encourage saving.
On the other hand if more people are saving, then spending declines and the rate of inflation goes down. If inflation is below the government’s target then the Bank of England can lower the base rate, making borrowing less expensive and encouraging people to spend in order to push inflation back up.
Who sets the base rate?
The base rate is set by a part of the Bank of England called the Monetary Policy Committee or MPC. Made up of 9 economic experts – 5 from within the Bank of England and 4 who are appointed by the government – the MPC is independent. It is their job to make decisions on the base rate, meeting 8 times a year and producing quarterly policy reports to explain the decisions that they make.
When deciding on changes to the base rate, the MPC’s 9 members each have one vote and there needs to be a majority in favour of altering the interest rate for it to happen. For example at their meeting in June 2022, the MPC voted by 6 votes to 3 to increase the base rate to 1.25% (though the 3 votes against were actually from MPC members who wanted to increase the rate by an even greater amount).
What is the current base rate and why are interest rates rising?
The current Bank of England Interest Rate (the base rate) is 1.25%, and is next due for review in August 2022.
As recently as December 2021 the base rate was at an historic low of 0.1%. This had been set by the Bank of England back in March 2020 to encourage spending and support the economy as the country came out of lockdown.
With restrictions easing and life beginning to return to normal, the Bank of England has continued to increase the base rate to combat rising inflation. The government’s target for inflation is 2% but it currently stands at 9%, its highest level for 40 years, and is expected to rise further throughout 2022. Therefore the Bank of England are changing the base rate more often to try and combat this and bring inflation closer to the 2% target.
What do rising interest rates mean for mortgages?
As mentioned above, when the base rate rises so does the cost of borrowing. When it comes to mortgages and what this means, it all depends on the type of mortgage you have.
Fixed-term mortgages have an agreed interest rate which does not change for the length of the agreed promotional term. For example if the base rate increased 3 years into a 5-year fixed term mortgage, that consumer would not be affected and would not see their payments increase for at least 2 years.
That’s because when a fixed term ends the interest rate reverts to a lender’s Standard Variable Rate (SVR). These are often much higher than fixed rates and, as the name suggests, these variable rates can move up whenever interest rates go up. It’s therefore vital that consumers do not let their mortgage roll on to an expensive SVR.
There are also variable and tracker mortgages which, like SVRs, increase in line with interest rate rises.
So in short – an increase to the base rate means higher interest rates and more expensive monthly repayments for anyone on a variable, tracker or SVR mortgage. Those on fixed term mortgages are unaffected unless their fixed term has just ended or is due to end very soon.
What do interest rate rises mean for MY mortgage and should I act now?
If you are on a variable, tracker or SVR mortgage then generally speaking you can expect the interest rate on your mortgage, and therefore your monthly payments, to go up by the same amount as the base rate rise. So for example when the Bank of England increased the base rate from 0.1% to 0.25% in December 2021, most lenders announced increases to the interest rates on their tracker mortgages by 0.15%.
The same applied following a 0.25% rise to interest rates in February 2022 – in fact this pushed the average Standard Variable Rate across all lenders to 4.61% and was the largest monthly rise that analysts MoneyFacts had seen since they began tracking the data.
To show how much more expensive a SVR can be compared to a fixed deal, MoneyFacts also found the average two-year fixed rate in March 2022 was 2.65%. Even this is the highest average for a two-year fixed mortgage since November 2015, showing how lower rates are increasingly hard to come by.
At a time of great financial uncertainty for many UK households and global instability with the current situation in Ukraine, many are finding whatever ways they can to save money and limit their future outgoings.
1) If you are on a variable, tracker or SVR mortgage then act NOW
If you have one of these types of mortgages then it’s likely you are paying too much already. What’s more, the Bank of England are predicted to increase interest rates again later in 2022 to an even higher level than was seen before the COVID pandemic struck. If that happens your rate is highly likely to increase even further.
By locking in now and making the most of today’s fixed rate offers, you will protect yourself from any such rate hikes before they continue the recent trend of making mortgages more expensive. You will have certainty over your monthly payments for the duration of the term you choose, allowing you to effectively manage your budget and handle other cost of living concerns such as rising energy bills.
Remortgaging does not need to be confusing, time consuming or even involve changing lenders if you don’t want to. For many, their existing lender will have fixed rates that are much more competitive than the SVR they are on now.
2) If the fixed term on your mortgage is due to end in the next 6 months then act NOW
If you are currently on a fixed term mortgage, the idea that new rates on offer are becoming more expensive may have you worried about what will happen at the end of your promotional period.
The good news though is that many lenders will honour mortgage offers and remortgage rates 6 months in advance. This means you can begin searching for the best deal long before the end of your fixed term, and benefit from lower rates currently on offer.
Again this could involve staying with your existing lender, or finding a better deal elsewhere – either way remortgaging is a straightforward process.
We will guide you through your available options, find the best deal from the whole of market and see your new remortgage all the way through to completion so you’ll always have someone in your corner, expertly guiding your application from start to finish.
If you have expensive debts we can even help consolidate these into more manageable payments as part of your remortgage, or free up funds to put towards home improvements.
Who are Your Mortgage People and how can you help me beat interest rate rises?
We are a whole of market mortgage broker – not a faceless comparison site or robotic quote engine – offering expert, personalised advice on mortgages, remortgages and homeowner loans.
As we are not attached to any particular lender, our team of CeMAP qualified advisors will offer you expert advice on all your options to find the deal that’s truly best for you. Our dedicated processing and completion teams will look after you and your application from start to finish and answer any questions you may have along the way.
All of which means we can:
- Explain the full impact interest rate rises will have on your mortgage according to your own specific circumstances
- Find you the best deal to avoid future rate hikes
- Listen to your needs to find you the mortgage deal that suits both your budget and your requirements
To get started with a free, no obligation discussion about your current mortgage needs just click below and one of our expert advisors will get in touch.
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