At the start of August, the Bank of England officially announced that they would raise the UK base rate from 0.5% to 0.75%. This is higher than it’s been for almost a decade, and it’s immediately brought about a lot of questions. Such as, “How does this affect my mortgage?” and “What will this do to my savings?” Well, it’s time to stop panicking. Here’s everything you need to know.
First off, what is the base rate?
The base rate, also known as the Bank Rate, is the official interest rate set by the Bank of England. This makes it the most important interest rate in the UK as it influences the actual interest rates you receive from your bank. The idea is that, as the Bank of England adjusts the UK base rate, high street banks adjust their rates accordingly.
Through natural economic adjustments, this then allows the Bank of England to hit its other monetary targets. Such as keeping inflation at around 2%. Understanding how this occurs is a little more complex, so we won’t go into detail about that here. However, what you are likely much more interested to know is …
How does the base rate affect mortgages?
In the most basic of senses, here is what happens when interest rates go up:
1. It makes it more expensive to borrow money
2. It makes it more worthwhile for you to save money
As such, it should make mortgages more expensive, however, the exact degree to which it affects your monthly payments will vary. For example, if you are on a fixed rate mortgage, then this most recent change shouldn’t make any difference.
If you are on a variable rate mortgage or a tracker mortgage, then the actual interest you pay each year could have gone up by as much as 0.25%.
– Old interest rate: 0.5%
– New interest rate: 0.75%
– Increase: 0.25%
Of course, things will depend greatly on your exact mortgage agreement. So for more information, you should speak to your bank.
As an example:
Suppose you have a £100,000 mortgage, with a 25 year term time and your existing mortgage interest rate is 2.5%. Well, the 0.25% increase will cause your monthly payments to increase from £449 to £461. That equates to £156 a year.
How does the base rate affect savings?
As mentioned above, increasing interest rates should make it more attractive to start saving. This is because interest rates represent the amount you earn on your deposits each and every year. For example, say you have £100,000 sat in a savings account earning 2% a year. That’s £2,000 a year. The 0.25% increase will cause your interest earnings to go up to £2,250 a year.
But once again, just because the Bank of England has put interest rates up, this doesn’t necessarily mean you will see the immediate benefits to your savings. This is because your bank is not legally obliged to raise their interest rates. In fact, with such a small increase, many leading banks might well choose to ignore it, or at least wait to increase them.
Which is frustrating, as you will likely see an increase in your mortgage payments much sooner than you would see an increase in returns on your savings.
How has the UK base rate changed over time?
As a result of the 2008 economic crisis, the Bank of England made the decision to slash interest rates from 5% all the way down to 0.5%. The idea behind this was to encourage people to start borrowing again, saving less and spending more.
Prior to the 2008 drop, interest rates had been relatively steady in the UK all the way since the early 1990’s. Prior to that, they were actually much higher. In 1979 they reached 17%, which is an incredibly high sum when you compare it to the 0.75% we have now. Imagine placing £100,000 in the bank at a rate of 17%!
Getting the most for your money
With interest rates gradually on the rise, it means that the property market is slowly changing. It is important that, if you are thinking of buying your first home or switching your mortgage provider, you need to know what you’re doing. Opting into a long-term variable rate mortgage might not be the wisest move. Instead, shopping around could save you a very large amount of money over the next few decades.
That’s why it’s worth giving us a call here at Clear Mortgage Solutions. With an in-depth knowledge of the UK mortgage market, we can provide you with unbiased advice on how to find the best mortgage deals currently available in the UK. We are not tied down to any banks, so only ever offer the best deal for you. To find out more, simply get in contact today.