If you have a mortgage or are looking to get one quite soon, it can be helpful to keep an eye on the Bank of England base rate, which has a significant impact on UK mortgages.
In this article, we’ll explore everything you need to know about the base rate, how it’s set, and what happens when it changes.
Understanding the Bank of England Base Rate
The Bank of England base rate is an important part of the financial landscape of the UK.
It is the interest rate that the Bank of England charges banks and other financial institutions for loans, and it serves as the benchmark for UK interest rates in general.
The base rate is determined by the Bank’s Monetary Policy Committee (MPC), which meets eight times a year.
How is the Bank of England Base Rate set?
The Bank of England sets the Base Rate based on a range of economic factors, including inflation, economic growth, and unemployment.
The Monetary Policy Committee (MPC) is made up of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, our Chief Economist and four external members appointed directly by the Chancellor. They set the Bank Rate and other monetary policy eight times a year (about every 6 weeks).
The MPC meets to assess the state of the UK economy and determine whether to raise, lower, or maintain the Base Rate. They aim to keep inflation at a preferred level and work towards keeping the economy stable.
The Base Rate and your mortgage
The base rate directly influences the interest rates offered by mortgage lenders. When the base rate changes, lenders adjust their rates accordingly.
However, the impact on your mortgage depends on the type of mortgage you have:
- Fixed-rate mortgages: The interest rate remains the same for a set period, regardless of changes in the base rate.
- Variable-rate mortgages: The interest rate can change over time, often in line with the base rate.
- Tracker mortgages: The interest rate is directly linked to the base rate and will change if the base rate changes.
For example, if you have a tracker mortgage and the base rate increases by 0.25%, your mortgage interest rate will also increase by 0.25%.
Fixed Rate Guide
Is a fixed interest rate right for you? We run through what a fixed rate mortgage is and what options you have when choosing one.
Tracker Rate Guide
What are they and how do they work? Find out how a tracker rate mortgage works and whether it might be suitable for you.
Mortgage Repayments Guide
Learn more about the monthly cost of different mortgages, including repayment and interest only.
The impact of Base Rate changes on mortgage applications
If you’re in the throws of applying for a mortgage, it’s essential to be aware that lenders may adjust their rates in anticipation of, or as a reaction to, base rate changes.
This means that the rate you are considering on a mortgage illustration (quote), may not be available when you apply.
Frustratingly, brokers are often only given 24-48 hours of a product withdrawal, during which time clients need to submit their applications, with supporting documents and fees.
Here are some possible scenarios:
Not yet applied FOR MORTGAGE
If you have not yet applied for a mortgage, then you will only be able to select product rates that the lender has on offer when you do. This could mean that the mortgage quote provided by your broker is now out of date and needs to be revised.
After researching your situation again, your broker may recommend going with a different lender as they are now more competitive.
MORTGAGE applied FOR
When you submit a full mortgage application (not a DIP), you will tell the lender which interest rate product you would like, and pay them the relevant booking or product fee.
At this point, most lenders will secure the rate for you while your mortgage is being assessed.
MORTGAGE OFFERED
The mortgage offer is a legally binding document that states all of the mortgage T&C’s, plus the product you have chosen.
Your rate will be safe until you complete on the mortgage. However, the offer itself will have an expiry date, so beware.
The effect of Base Rate changes on existing mortgages
If you already have a mortgage, changes in the base rate will impact your monthly repayments, if you have a variable or tracker mortgage. Here are some strategies for managing potential rate increases:
Overpay your mortgage
If you can afford to, overpaying your mortgage or paying off a lump sum, can help reduce the total amount of interest you pay.
Extend the term
Your monthly repayments are affected by the number of years left on your mortgage. One option could be to ask your lender to lengthen the term by a few years, which will reduce the monthly repayments.
Consider remortgaging
If rates are rising, it might be worth looking into remortgaging to a fixed-rate deal to protect yourself from future increases. This can be done with a remortgage over to a new lender or via a product transfer with your current lender.
Before making any decisions regarding these options you should always seek advice. If you are already in a fixed rate deal, have a look at when this ends so you have enough time to prepare.
The Base Rate and the broader housing market
The base rate doesn’t just affect mortgages – it also has a significant impact on the broader housing market.
When the base rate is low, borrowing is cheaper, which can stimulate demand for houses and potentially drive up prices.
Conversely, when the base rate is high, borrowing is more expensive, which can dampen demand and potentially lead to a drop in house prices.
You will find more useful information in our article: “How much does the average mortgage cost?“
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Understanding the impact of the Bank of England base rate on your mortgage is helpful for making informed decisions about your home loan.
Whether you’re applying for a mortgage, already have one, or are simply interested in the housing market, being aware of the base rate and its potential fluctuations can help you plan for the future.
Remember, while the base rate can influence your mortgage, it’s just one of many factors to consider.
Seeking advice
If you’re feeling overwhelmed by the complexities of mortgages and the base rate, don’t worry – you’re not alone.
Consider reaching out to a mortgage broker or financial adviser who can provide personalised advice tailored to your circumstances and help with any concerns.
Remember, knowledge is power – and you’ve already taken the first step by educating yourself.
