“The base rate” and “a rise in the base rate” is a phrase often bandied about by the media when discussing financial matters – but what is the base rate, what does it do and how does it’s movement affect your personal finances? Let’s find out…
What is the base rate?
The base rate is the level of interest that the Bank of England charges when they lend money out to commercial banks. It is reviewed eight times a year, at which point in can increase, decrease or stay the same. At the time of writing, the base rate is set at 0.75% and has been at this level for the past 18 months.
Great – but how does that affect me?
The base rate essentially ends up dictating the offers that banks pass on to consumers in the guise of mortgage products, loans, other credit, and savings. A higher base rate is generally good news for savers, who will be able to earn more interest – but bad news for borrowers who may find that mortgages, loans and other credit is more expensive. Of course, the converse would be true should the base rate go down rather than up.
What would happen to my finances if the base rate went up tomorrow?
Check out our summaries below to get an idea of how your
personal finances might change with a base rate rise (although please be aware
that there is no indication that any rate change is impending – this is purely
hypothetically right now).
According to an expert we spoke to from short term loan broker Growing Power:
If you already have a loan, then your rate will have been decided when you took out the loan and this will not change. So there should be absolutely no impact to you and your ability to afford the repayments on this.
If however, you are yet to take out your loan, then it may mean that the interest rate increase means you have to rethink the amount you want to borrow, or the term-length you want to borrow over, in order to meet the repayment amounts more comfortable each month.
A base rate rise is good news for savers. Chances are you will see new headline rates advertised and this may be a great time to sign up for a new savings account.
For existing savings, it entirely depends on what type of savings account you have. If you have signed up for a fixed rate bond, then chances are you are not going to feel the benefit of the base rate rise, and indeed, the rate that you locked in previously may now not feels so competitive. Many fixed-rate savings don’t allow you to withdraw your money until the term is complete, whereas some will allow you to take out your money but you may need to pay a penalty.
However, if you have a tracker savings account, this follows the Bank of England base rate, so you can expect to see an immediate increase in your interest rate.
Other types of savings account should receive the benefit of the rate increase, although it may not be passed down immediately and is not actually guaranteed to increase at all – although if this is the case and you are not locked into the account, maybe it would be a good time to consider shopping around and move your savings to a better-paying account.
Just as with savings, it really depends on what type of mortgage you have. If you have a tracker mortgage, then a rate increase will be bad news for you, as the interest rate on your mortgage will also go up and you will be paying more in interest immediately.
However, if you have a fixed-rate mortgage then your repayments will be unaffected for the term that was specified when you signed up for the mortgage. Once this term has expired, assuming the base rate hasn’t come down again, then you will probably find that all of the mortgage products available on the market are now at a higher rate than your previous fixed-rate – and consequently, you may find your monthly repayment amount will need to increase – so you will still feel the impact, it may just be a delayed effect.
So there we have it. Hopefully, this has article has given you a good insight into how any change in the base rate may affect you on a personal level. But if you have any further questions, feel free to leave them in the comments below.