Have you ever wondered how mortgage lenders set their interest rates? Where does the interest rate percentage come from? The answer is, that the Bank of England base rate influences your mortgage interest rate.
As a homeowner or a landlord, you should understand the base rate because it helps you identify and prepare for interest rates rising.
What is the Bank of England base rate?
The Bank of England is the central bank of the United Kingdom. It closely monitors the nation’s economy and spending.
The Bank of England only lends money to commercial banks and governments, not individuals seeking a personal account. (That’s right, banks also need to borrow money to fund their operations).
The ‘interest rate’ that the Bank of England charges each commercial banks for their loan is known as the ‘base rate’. At the time of writing, the current base rate is 0.75%
Reviewed each month by the Bank of England Monetary Policy Committee, the base rate is set to control the cost of living (inflation).
When more consumer spending is needed to boost the UK economy, the Bank of England increases the base rate. Contrarily, if the cost of living is rising too quickly, the Bank of England decreases the base rate, making it more expensive for consumers to borrow money. Thus, this reduces consumer spending.
How does the base rate affect your mortgage repayments?
If you are on a fixed-term mortgage, your repayments remain the same every month. Hence, a base rate drop and hike will not affect you.
However, if you are on a non-fixed term mortgage, changes to the base rate impacts your monthly mortgage repayments.
If the base rate increases, the ‘interest’ that commercial banks owe to the Bank of England also increases. And so, commercial banks hike up their interest rates to cover this cost. This means your monthly mortgage repayments become more expensive.
Contrarily, if the base rate decreases, interest rates also drop. This means your monthly repayment reduces. If your lender does not decrease their interest rates after the base rate has been lowered, consider switching to a cheaper lender.
So, do base rate hikes worry you?
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