The Bank of England recently decided to maintain the Base Rate at 5.25%, but what is the Base Rate and how does it affect your mortgage?
What is the Base Rate?
The Bank of England (BoE) sets a Base Rate of interest which is used to charge other banks and lenders when they borrow money. This means it influences what savers earn on their savings, and the interest rates that many lenders will charge for mortgages, loans and other types of credit.
The BoE can change the Base Rate to influence the UK economy. To stimulate spending and economic growth, they may lower the Base Rate to encourage people to spend more (as people will be earning less on their savings and will be able to borrow at cheaper rates). However, this tends to increase inflationary pressure on goods and services. On the reverse of this, the BoE may raise the Base Rate to help control the rate of inflation.
The Current Base Rate
The Base Rate is reviewed 8 times a year. At its meeting ending 8th May 2024, the BoE’s Monetary Policy Committee voted a majority of 7-2 to maintain the Base Rate at 5.25%, with two members preferring to reduce the rate by 0.25% down to 5%.
The next bank rate will be decided on 20th June 2024, and there are hints that the BoE could choose to make a cut to the base rate then.
“Inflation has fallen a lot. About a year ago it was over 10%. Now it’s just above 3%. We expect it to fall further to around 2% in the next few months, and that is encouraging. But we need to make absolutely sure that inflation stays low in the future, so today we’ve decided to keep interest rates unchanged at 5.25%. The economy is growing, the global factors that previously pushed up prices in the UK are fading, and higher interest rates are also helping to bring inflation down. We need to see more evidence that inflation will stay low before we can cut interest rates, but I’m optimistic things are moving in the right direction” – Andrew Bailey, Governor of the Bank of England
How is My Mortgage Affected?
If you are on a fixed rate mortgage, changes to the Base Rate won’t immediately change your payments, as they are fixed for your loan term. However, you will likely see changes when your fixed period ends and you move to a variable rate mortgage.
For those on tracker mortgages, your interest rate tends to track the Base Rate. This is different to a variable mortgage, where a mortgage lender sets their own variable rate. Tracker mortgages don’t exactly match the Base Rate of interest, and instead tend to be set just above this. For example, you may pay 1% more than the Base Rate, meaning that if the Base Rate was to fall from 5.25% to 5%, your mortgage rate would go down from 6.25% to 6%.
Standard variable rates can change at any time and aren’t always affected by the Base Rate. Changes to these rates are decided by the lender themselves, but a lender’s standard variable rate will often change along with the BoE’s rate, rising and falling as the Base Rate goes up and down.