The base rate is the UK interest rate set by the Bank of England. A change in the base rate is likely to affect your mortgage rate. By understanding what it is and how it works, you can avoid paying more than you need to.
The Bank of England's base interest rate is currently 0.10%.
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 for borrowing money.
The amount UK banks charge their customers for borrowing money is often influenced by the current base rate. As a mortgage is a form of borrowing money, any change in the Bank of England base rate is likely to affect your mortgage interest rate.
How you’re affected will depend on the type of mortgage you have.
Your payments won’t be affected if you have a fixed rate mortgage until your fixed period ends. But be careful if you’re fixed rate period is coming to an end soon.
Once your fixed rate deal ends, you’ll be moved to the bank’s standard variable rate. If your lender’s interest rates have risen, you may no longer be on the best deal. You might want to look into getting a new deal to avoid paying interest at a higher rate.
If you have a tracker mortgage, discount mortgage or a standard variable rate mortgage, your rate is likely to change in line with the base rate. Your bank will usually notify you of any changes to your mortgage repayments.
You might have also heard the Bank of England base rate referred to as the UK interest rate.
The current interest rate in the UK is 0.10%.
The Bank of England base rate graph over time:
Source: Bank of England
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 you use 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 interest rate is 1%, you’ll pay £1 in interest.
An increase in the current base rate is typically a bad thing if you’re borrowing money. 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. You’re lending it to them. And they need to pay you interest for borrowing it 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 Bank of England meeting, and the next time the base rate will be reviewed is 7 May, 2020.
In the review, the Monetary Policy Committee (MPC) makes a decision on whether the interest rate will increase, decrease or remain stable.
The base rate does not change every time the Bank of England meets. The last time the base rate changed was Thursday 19 March, 2020 when the base rate was cut for a second time this year to its lowest historical rate of 0.10% down from 0.25%.
On 11 March, 2020, the BoE cut the rate from 0.75% to 0.25% in response to the economic crisis resulting from the Coronavirus (COVID-19) pandemic.
The Bank of England raises and lowers their interest rate to help influence the UK economy.
If the Bank of England make the decision to raise interest rates, it encourages people to save more. With a high interest rate, there’s more incentive for people to want to save their money.
Lowering the interest rate has the opposite effect, encouraging people to spend more. But this can lead to inflation. Inflation is the rate of the price of goods and services increases. A high inflation rate means we end up paying more for the things we spend our money on.
Because of the effect a change in base rate can have on people’s spending habits, the base rate is a key part of maintaining a stable economy.
The Bank of England has stated that it's closely watching how Brexit unfolds to decide whether it should raise or lower the base rate.
When (or if) Brexit occurs and we leave the European Union, it will likely have a large impact on the British economy. If we have a no-deal Brexit, the BoE says it may drop the interest rate to stimulate the economy. If we Brexit with a good deal, the base rate could stay the same or increase to counteract inflation.
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.
Historical interest rates:
UK record of interest rate stability (April 1719 - June 1822) From 1st April 1719 to 1st June 1822, the base rate remained at 4%, before rising to 5%. That’s over 100 years of stability
Highest ever interest rate (December 1979) The base rate hits its highest peak ever at 17%. It remained at 17% until 1st June 1980
Lowest ever interest rate (March 2020) The base rate dropped to a historical low of 0.1%