The Bank of England (BoE) base rate is used to determine interest rates in the UK. Put simply, it is the price banks and lenders pay to borrow money.
Interest rates influence many areas of financial planning, including savings accounts, credit cards, loans and, perhaps most significantly, mortgages.
When the BoE base rate changes, it’s quite common for mortgage rates to go up or down depending on the type of mortgage you have – as we’ll see below.
Always remember your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments.
How is the base rate decided?
The base rate is decided by the Monetary Policy Committee (MPC). The MPC meets around eight times a year to discuss changes to base rate, taking into consideration factors such as inflation, economic growth and UK employment rates.
Once the meeting has taken place, each member of the MPC votes on the decision, with the majority determining the outcome.
Why do interest rates change?
Put simply, interest rates are used to control inflation. If the MPC feels that inflation is rising too quickly, it may try to limit it by raising the base rate. When the base rate rises, so do interest rates.
When interest rates rise, the cost of borrowing money (for example, a mortgage loan) becomes more expensive.
How do interest rate rises affect my mortgage?
The impact an interest rate rise has on your mortgage will depend on what type of mortgage you have, and when your deal comes to an end.
Variable rate mortgages
If you’re on a variable rate mortgage with a lender whose interest rate rises in line with the Bank of England’s base rate, you may find that the cost of your monthly repayments increases.
If you have a tracker mortgage, this will definitely be the case. This is because tracker mortgages “track” an external base rate – usually the Bank of England’s.
If you’re on a fixed-rate mortgage, you won’t see any change until the end of the fixed period, at which point you’ll be switched to your lender’s standard variable rate (SVR) unless you remortgage.
If you’re reaching the end of your fixed-term period, it’s wise to speak to your mortgage provider as early as possible. The sooner you speak to your lender, the more likelihood you have of locking in a fixed rate that may potentially protect you from possible interest rate rises in the future.
To find the best deal for your circumstances, it’s advisable to get in touch with your lender at least six months before your fixed-term period ends.
Your provider will find you the best deal they can, but there may be more competitive products elsewhere. This is why it can also be a good idea to seek independent advice from a Specialist Mortgage Adviser if you're thinking of remortgaging.
How to reduce your mortgage interest rate
Knowing how to reduce your mortgage interest rate may feel a little unachievable, but there are a number of things you can consider.
- Assess your loan-to-value (LTV) – If you’ve been paying off your mortgage throughout a fixed-rate period, your LTV bracket may have changed. For example, if your LTV started as 90%, but is now 80%, the interest rate on your new mortgage may be more favourable. You can also decrease your loan-to-value ratio by making overpayments on your mortgage, but it’s wise to speak to your lender to discuss your options.
- Find the best deal for you – A mortgage is one of the biggest financial commitments you’ll make in life, so it’s important to find the best deal available to you. This is where a specialist mortgage broker can help. When choosing a broker, be sure to find one that has access to the best rates and deals from a range of specialist lenders.
- Get the support you need – If you’re worried about how interest rate rises are going to impact your mortgage plans, speak to a Specialist Financial Adviser from Wesleyan Financial Services for expert guidance tailored to you.