Bank of England Base Rate – Explained

by Mark Johnston

Since the start of the current financial crisis everyone seems to be taking a closer interest in the financial sector. At times we seem to talk in codes AER, repo rate, LIBOR are just some of the terminology that gets used when talking about our mortgages. When someone mentions the base rate we all nod in agreement, at last this is something we understand…but do we?

The Bank of England is the central bank for the United Kingdom, which means it looks after the UK’s monetary stability. One of the banks responsibilities is to look after monetary stability. Monetary stability means stable prices, low inflation and confidence in the currency. The bank of England controls the cost of money by influencing the interest rates. To combat inflation of deflation the bank may increase the cost of borrow by putting up interest rates or reducing the cost by lowering them.

At the moment interest rates are at an all time low (0.5%), this is great if you are looking for a mortgage as its cheaper to borrow money, but those of us who have savings are negatively impacted as they don’t receive as much money in terms of interest for the savings in their accounts.

But how does this really affect me as a borrower I hear you ask. Well most mortgage providers tend to use the base rate to calculate the price of their mortgages. Tracker and variable rate mortgages tend to be linked to the Bank of England base rate. For example a tracker mortgage may track at 2% above base rate. With the current base rate at 0.5% you would be paying a rate of 2.5% (2% plus base rate of 0.5%). If the base rate does up to say 1% your mortgage rate and subsequent payments would increase as well to 3% (2% plus new base rate of 1%).

Variable rates work in the same way although it’s good to remember that not all mortgage provider use the Bank of England base rate to calculate their rate so its good to find out. Fixed rate mortgages on the other hand are set at a fixed rate of interest so they aren’t affected by base rate changes until the end of the fixed rate term. Many people like fixed rate mortgages because they provide a level of financial stability as repayments remain the same for a set period of time.

Understanding how the base rate can effect your mortgage payments will enable you to make a better decision when it comes to taking out a mortgage or re-mortgaging your current property. Once understood, its easy to work out how any changes in the Bank of England base rate will have on your monthly outgoings.

The Bank of England review the base rate on a monthly basis this is done by the Monetary Policy Committee or MPC. Speak to your mortgage advisor or mortgage provider about how your mortgage rates are calculated. With this information, listen out for the next Monetary Policy Committee decision and see how it effects your monthly mortgage repayments.

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