What is the base rate?

The Bank of England base rate, also known as the ‘Bank Rate’, is the interest rate that the Bank of England lends money to banks and financial institutions in its capacity as the central bank.

Why does the base rate matter?

The base rate used as the benchmark for interest rates generally, and changes to it can affect the interest rates on various financial products like mortgages, loans, and savings accounts. The higher the base rate the more expensive mortgages and other kinds of borrowing will become.

How do changes in the Bank of England base rate affect mortgage rates?

The base rate, set by the Bank of England, is essentially the cost at which banks and other financial institutions can borrow money. This rate influences the interest rates that these institutions charge their customers, including those on mortgages.

When the base rate increases, lenders typically raise the interest rates on their mortgage products, making loans more expensive for borrowers. This means if you have a variable-rate mortgage, your monthly payments could go up.

On the other hand, when the base rate decreases, lenders usually lower their interest rates, which can make borrowing cheaper. Therefore, if you have a variable-rate mortgage, your monthly payments could decrease.

However, if you have a fixed-rate mortgage, changes to the base rate won’t impact your monthly payments during the fixed-rate period. But it could affect what interest rate you might be able to get when it’s time to remortgage.

Why do increases in the base rate increase interest rates on my mortgage?

Banks are businesses and need to make a profit to survive. They earn by lending money at a higher interest rate than what they pay to borrow it. If their borrowing cost increases (due to a higher base rate), they typically pass on this cost to their customers by raising interest rates on products like mortgages, loans, etc. If their borrowing cost decreases (with a lower base rate), they may lower the interest rates for their customers, making borrowing cheaper.

Why might the Bank of England raise the base rate?

The base rate is a tool used by the central bank to control inflation and manage economic growth. If the economy is overheating and inflation is high, the central bank might increase the base rate to make borrowing more expensive, thus slowing spending. If the economy is slowing down, the central bank might lower the base rate to make borrowing cheaper, encouraging spending and investment. So, while the base rate doesn’t directly set mortgage rates, it significantly influences them. Because banks take cues from the base rate movement to decide and adjust their own lending rates