Bank of England base rate

The Bank of England's (BoE) base interest rate is currently 4%, after the Monetary Policy Committee (MPC) took the decision to increase the rate by an additional 0.5%, the 10th consecutive increase in a row.

The rate now sits at the highest rate it’s been since 2008 and many economists believe that, despite a recent fall in inflation, additional increases may be necessary to accomplish the MPC’s target of 2% inflation. The next decision will be made on 23 March.

It was cut twice in March 2020 to ease the economic pressure caused by the coronavirus pandemic – from 0.75% to 0.25% on 11 March and to 0.1% just eight days later on 19 March. However, it has been raised by the Bank of England several times in 2022, and this trend looks set to continue in 2023.

The Monetary Policy Committee (MPC) set the base rate, usually meeting every six weeks to decide what should happen to it. However, in times of crisis it can meet more frequently - with the two cuts responding to the Coronavirus pandemic occurring before scheduled.

The base rate is an interest rate set by the Bank of England (BoE). It’s the amount the Bank of England charges UK banks to borrow money.

The amount UK banks charge their customers to borrow money is often influenced by the base rate. As a mortgage is a form of borrowing money, any change in the Bank of England base rate has the potential to affect your mortgage interest rate.

How you’re affected will depend on the type of mortgage you have.

If you have a tracker mortgage, the rate is usually directly linked to the BoE base rate. So if the base rate increases or decreases, your mortgage rate will change by the same amount. So, for example, after an increase of 0.5%, the average monthly repayment for a £200,000 loan will cost £57 extra.

Your payments won’t be affected if you have a fixed-rate mortgage until your fixed period ends. However, once your fixed-rate deal ends, you’ll be moved onto your lender’s standard variable rate, which is likely to be higher.

It’s usually a good idea to look into new deals at this point - to avoid paying interest at a higher rate. However, base rate increases could mean the deals available are more expensive than the last time you got a mortgage.

Fixed-rate mortgage interest rates have been in gradual decline in the early part of 2023 and the February increase to the base rate is not expected to impact this trend, as mortgage lenders tend to adjust their rates ahead of time to account for worst case scenario increases. However, each lender sets their own fixed-rate deals, and not all lenders will interpret market rates and adjust their fixed-rates in the same way. This means it's always worth looking at what's available, especially compared to standard variable rates (SVR) which are currently at their highest since 2008 at 6.64%*.

*Feb 2 2023, please notes rates can change very quickly

If you’re on a standard variable rate (SVR), or discount rate set on your lender’s SVR, it’s less obvious whether base rate changes will directly affect your interest rate.

Following the mini-budget in September 2022 and resulting economic turbulence, lenders factored in significant price increases to many of their mortgage products. As the economy has settled, mortgage rates have, overall, decreased over the past few months despite the base rate increasing.

If you’re within the last six months of any type of mortgage deal at the moment, it’s absolutely worth speaking to a broker to look at the potential fixed-rate options available to you through a remortgage. Whilst certainly not as attractive as they’ve been in recent years, at the current time, both two and five-year fixes are likely to be cheaper than staying on your lender’s SVR and potentially discount rates, depending on the size of the discount.

There was a gradual reduction in two and five-year fixed rates throughout December 2022 and January 2023, however, it’s important to remember that the most attractive rates are only available to those with a substantial deposit or equity and a good credit rating. 

Those coming out of previous two, three and five year fixed-rate deals that were fixed when interest rates were much lower across the board, will almost certainly see a rise in the rates available to them when remortgaging. That said, this is likely a slightly smaller increase than they would have seen if remortgaging back in November 2022.

It’s possible to lock in a deal with most lenders up to six months before your existing deal ends, so it’s certainly worth locking in at interest rates today - especially given the average length of a deal is now just 15 days*.

As you're not locked into the deal until your existing one ends, if the pattern of falling fixed-rates continues, you can always opt for a better one at a later date, should you find one. 

*as at January 2023

Despite a gradual decline in both property prices and fixed-rate mortgages, there’s no denying that it’s a difficult time for first-time buyers. Buyers not yet on the property ladder need large deposits in order to access the most competitive interest rates, and with the average cost of a UK home currently £294,910, that’s no mean feat. 

The help to buy scheme ended for applicants in England back in October 2022, but there are still a number of home ownership schemes that could help first-time buyers who are struggling to raise a deposit, to begin their home ownership journey sooner. The following schemes may be helpful; Shared Ownership Scheme, First Homes Scheme, Right to Buy/Right to Acquire for council and housing association tenants respectively and the Deposit Unlock scheme, which has been extended until the end of 2023. 

With both house prices and fixed-rate mortgages expected to continue to fall throughout 2023, it’s perfectly possible that buying a home could be more affordable for first-time buyers towards the end of the year. However, whether you will benefit from buying now or later will depend largely on your individual circumstances, so it’s a good idea to speak to a broker before you make a decision. 

You might have heard the Bank of England base rate referred to as the UK interest rate.

Banks will often set their own interest rates based on the current UK interest rate. How the rate impacts you will depend on whether you’re borrowing or saving money with your bank.

If you’re borrowing money through a mortgage or loan, your bank will charge you interest for borrowing that money. The interest rate is what is used to calculate the actual amount you’ll be charged. It’s a percentage of the total amount borrowed.

For example you might borrow £100. If the bank’s annual interest rate is 1%, you’ll pay £1 in interest over a year.

An increase in the current base rate is normally a bad thing if you’re borrowing money as your bank is likely to charge you a higher rate of interest, meaning you pay more.

When you save money, the bank will pay interest to you. That’s because, when you save, you’re handing your money over to the bank. This means you’re effectively lending the money to it so it needs to pay you interest for borrowing the money from you.

If you’re saving money, a rise in the UK interest rate is likely to benefit you as you’ll be earning more from the higher interest rate.

The Bank of England reviews the base rate eight times a year. The next MPC base rate announcement is set for 23 March 2023.

The base rate does not change every time the Bank of England meets. Interest rates were on hold at 0.1% from March 2020 to December 2021 before they started rising again.

The Bank of England raises and lowers its interest rate to help influence the UK economy. If the Bank of England makes the decision to raise interest rates, it encourages people to save more as they will get a higher interest rate on their money and the cost of borrowing will rise. 

Lowering the interest rate has the opposite effect, encouraging people to spend more, but this can lead to inflation. Inflation is the rate at which the prices of goods and services increase. A high inflation rate means we end up paying more for the things we spend our money on than previously.

Because of the effect a change in the base rate can have on people’s spending habits, the base rate is a key part of maintaining a stable economy.

Historically, interest rates have remained relatively stable throughout UK history since the Bank of England was founded in 1694 but certain periods in base rate history stand out:

The graph below shows how the base rate has changed since 2012:

Source: Bank of England

Here’s how the base rate has changed since 2006, starting from the most recent change: