By: Sarah Williams

The past few months have been challenging for most. In particular, homeowners have been on quite a rollercoaster. With two prime ministers, the mini-budget, the pound taking a nosedive, and multiple increases in the base interest rate, the financial market has been in turmoil, and we are all still recovering from it. Here, we will explain interest rates and the potential impact the increases may have on your mortgage.

What is the Bank of England's base rate?

The base rate is determined by the Bank of England (BoE). A central bank, differing from commercial banks such as Barclays, Santander, Halifax etc. Central banks do not offer borrowing to the public and instead provide services to the UK government, other central banks, and some financial sector firms.

The terms ‘Bank of England base rate’ and ‘the base interest rate’ refer to the same thing. The rate determines what a central bank such as the BoE charges commercial banks for loans. Commercial banks then set their own interest rates for customers; however, the rates tend to rise and fall with the base rate set by the central bank. The Bank of England base rate rose again in November by an additional 0.75% to 3%. This is the biggest single increase seen in 33 years, and the rate is at the highest level since the financial crisis of 2008.

Why is the base rate increasing?

The base rate is changed to control inflation. Inflation is the term used to describe rising prices. Essentially, inflation means money is becoming worth less overtime. There are several causes of inflation, but the current rise in inflation is relative to low supply and high demand pressures. The Bank of England control inflation by manipulating their base rate. Either with the aim of encouraging people to spend money or discouraging it. If inflation is rising too quickly, the BoE may try to limit it by raising the base rate. It then costs more to borrow money, but you can also earn more on your savings. The idea is to encourage people to borrow less and save more, thereby reducing the demand for certain goods and service. Which, in turn, could slow inflations increase.

The impact the varying base rate will have on your mortgage will depend on the type. Mortgages fall into two broad categories – fixed and variable. The base rate will impact fixed and variable rate mortgages differently. We will explain a bit more about each below.

Fixed term

If you are on a fixed rate mortgage, you won’t see any increase in your monthly payments as the base rate fluctuates. A fixed term mortgage fixes your interest rate for a set amount of time, so regardless of the base rate, your payment will stay the same. However, it is important to note when your fixed rate deal ends, as you will most likely switch automatically to a standard variable rate mortgage. You should seek advice in the months up to your deal ending to prevent seeing a sharp increase in your monthly costs when you come to remortgage. Now the markets have calmed, several lenders are now decreasing their fixed rate interest rates for those looking for a new mortgage.
 

Tracker mortgages

A tracker mortgage is a type of variable mortgage that ‘tracks’ a base rate - usually the Bank of England base rate. The base rate is reviewed every 6 weeks, and it will be decided if the rate should go up or down. Hence, with a tracker mortgage, your monthly payment can vary every month. They differ to a standard variable loan, in which the lender will set their own variable rate. However, a tracker mortgage follows the base rate, which is not controlled by commercial banks.

As the base rate was increased 0.75% it is likely your interest rate will go up proportional to that amount.
 

Standard variable mortgages

If you have a variable rate mortgage, this means that your mortgage rate goes up or down at the discretion of your lender. When your lender increases your rate, your monthly payment will increase and vice versa.  Your lenders decision to increase or decrease your rate is influenced by the base rate, but not directly linked. Around 1.8 million people in the UK are on these variable deals, and since Dec 2021 their monthly bills have drastically increased alongside the Bank of England base rate increases.

If you would like further advice as to how the base rate increases affects your mortgage, contact us and one of our advisors will be happy to help.