The base rate can fluctuate, affecting a variety of factors. Continue reading to learn more about what a base rate is, how it is calculated, and how it affects mortgages.
What is base rate?
The base rate, also known as the base interest rate, is the interest rate charged by a central bank (in the UK, this is the Bank of England) to banks for loans.
The current Bank of England base rate is 1.25%.
The base rate was raised by 0.25 percent on June 16, 2022, the fifth increase since December 2021.
How is base rate calculated?
The Bank of England has a Monetary Policy Committee (MPC) that votes on whether to raise or lower the interest rate. In response to inflation reaching 9%, well beyond its target, the committee voted to raise the rate.
There are numerous factors to consider when calculating the base rate. Such as deposit and administrative costs, as well as the bank’s profitability
Why does base rate change?
The MPC votes on the base rate approximately eight times per year. However, if the committee deems it necessary, they may make unscheduled changes. One example is from March 2020, when the base rate was reduced due to the economic impact of COVID-19.
The vote is meticulously deliberated and focuses on broader economic factors such as whether we’re on the verge of a spike in inflation or whether spending levels are rising.
Understanding the impact of a changing base rate
If the base rate is lower, it means that people who borrow money will have to pay a lower interest rate.
A higher base rate, on the other hand, isn’t always a bad thing because it means people with savings can earn better returns.
How the base rate impacts your mortgage
Mortgages can become more expensive as the base rate rises. However, as previously stated, savings account rates may begin to rise, so if you don’t have a mortgage, now is a good time to start saving for one.
If you already have a mortgage, the base rate increase will affect you differently depending on the type of mortgage you have.
Here are a couple of examples:
- If you have a fixed-rate mortgage, you are protected from rate increases based on the length of your term. For example, if you are three years into a five-year fixed-rate mortgage, you will continue to pay the same amount for the next two years.
- A change in the base rate can have a significant impact on a tracker mortgage. This is because, as the name implies, this type of mortgage tracks the base rate and a predetermined margin. As a result, if the base rate rises, so will your repayments.
- If you have an SVR mortgage, your payments may increase significantly. Although the SVR may not increase payments in full, they are still likely to rise.
Closing thoughts
If you’re concerned about the base rate increase and your mortgage, or if you have any other questions, contact Sett today for expert advice.