What is the Bank of England base rate?
The base rate is the interest rate set by the Bank of England’s Monetary Policy Committee, or MPC. It is the rate the Bank of England charges to lend to commercial banks, and it is the benchmark that interest rates across the UK economy take their lead from.
The MPC meets eight times a year to decide whether to raise the base rate, lower it, or leave it where it is. That call rests on economic conditions, and inflation in particular. When inflation runs high, the MPC may lift the base rate to cool spending. When the economy is weak, it may cut the rate to nudge borrowing and investment along.
How the base rate affects tracker mortgages
Tracker mortgage rates move in step with the base rate. If the base rate rises by 0.25%, your tracker rate rises by exactly 0.25%. It works the same way on the way down. Because the link is so direct, tracker borrowers feel every base rate decision straight away.
Take a £200,000 mortgage with 20 years left to run. A 0.25% rate increase adds roughly £25 to £30 a month to your repayments. A full 1% increase could add £100 to £120 a month. The exact figures shift with your balance and how long you have left. Our repayment calculator shows the effect on your own mortgage.
How the base rate affects fixed rate and SVR mortgages
On a fixed rate, base rate changes do nothing to your current payments. Your rate is locked until the fixed period ends. What the base rate is doing will, though, shape the deals on offer when you come to remortgage.
Standard variable rates are set by each lender and can change at any time. SVRs tend to track the base rate loosely, but lenders are under no obligation to pass a cut on in full. Plenty are quicker to push their SVR up than to bring it down.
What to do when rates are rising
If you are on a tracker or SVR and rates are climbing, it is worth asking whether a switch to a fixed rate would give you more stability. Locking a fixed rate ahead of further rises can protect your budget. Bear in mind, though, that fixed rates may already price in the increases the market expects.
Already on a fixed rate? Rising base rates leave you untouched until your deal ends. Start looking at remortgage options three to six months before your fixed period expires, so you do not slip onto a pricey SVR.
Get advice on base rate changes
Working out how rate changes hit your mortgage can get involved. At Clearview Mortgage Solutions, our advisers keep on top of base rate developments and can spell out what each one means for your situation.
Whether you are weighing up a tracker, thinking of moving from a variable rate to a fixed one, or coming to the end of a fixed deal, we can help you land on the right decision. Contact us for a free, no-obligation chat.