Interest rate rise FAQs
About the base rate, how it affects mortgages and what you can do about it
What is the base rate?
The base rate of interest is set by the Bank of England (BoE) to manage the economy and influences all other interest rates across the market, including notably, mortgage rates.
It is decided by the BoE’s nine member Monetary Policy Committee (MPC), who usually vote on the first Thursday of each month on whether it should go up or down.
What affects the base rate?
In theory, the base rate will be raised during times of economic growth to act as a “collar” on inflation and is lowered in times of recession to stimulate growth by making it cheaper for businesses and individuals to borrow.
However, the MPC look at several factors to decide when to raise or lower rates, and how much by. A few that have been taken into account over recent years:
- Government spending policy
- Consumer and business confidence
- Unemployment rate
- Inflation rate
- Household savings and debt levels
- The value of the pound
The MPC decisions are a matter of public record and a report is issued to explain why the decision was taken after each vote.
If you'd like to know more, the Bank of England has produced an informative infographic to explain the 2 November 2017 rate rise.
How does the base rate affect mortgage rates?
Historically, mortgage rates and the base rate of interest are closely linked, with mortgage rates closely following movements of the base rate.
Average mortgage rates and the base rate of interest
Of course, as the base rate hasn't gone up in almost a decade, there’s no precedent to see how mortgage rates might respond to a rate rise after so long.
What can you do about a rate rise?
If you are in a position to remortgage it could be worth looking at doing so.
If you’re on your lender’s standard variable rate (SVR) you could likely remortgage to a cheaper rate, even if the Bank of England doesn’t take the base rate up.
Though, in all cases, before you rush into remortgaging you should check that it makes sense for you. Look at what fees you’ll need to pay and how long you have left on your mortgage term to check that it actually works out cheaper.
If you do decide to remortgage there are three types of mortgage rate you could switch to.
This gives you set a set rate (and monthly repayments) for a number of years, typically between two to five years, but sometimes as long as 10 years.
A fixed rate is the most popular mortgage type in the UK, and is typically a safe choice around the time of a rate rise. Of course there is the risk of rates falling after you fix and getting stuck on a relatively high rate. But, right now, a rate fall looks unlikely.Has the time come to fix a rate?Compare fixed rate mortgage deals
This will be pegged to the Bank of England’s base rate with a set markup, for example you may need to pay the base rate interest +1%.
Many people choose tracker rates as it offers some long-term security (many tracker rates are “lifetime”) and will likely follow the wider economy, so when times are good you should pay more and less when times are a little tighter.Is tracking the base rate a good idea?Compare tracker rate mortgage deals
Variable discounted rate
With a variable discounted rate you have a set discount over your lender’s SVR. If they take their SVR up, your mortgage rate will rise accordingly.
Though, your discount will remain in place. For example, if your discount is 1% and your lender’s SVR is 3%, your rate would be 2%. If your lender raises their SVR to 4%, your rate would increase to 3%.
Variable rates are often lower than fixed rates to begin with, but the cost of your mortgage could be increased from the initial rate (and likely will, as lenders tend to raise their SVRs around a base rate rise), however it can also go down.Are you happy to see where variable rates go?Compare variable rate mortgage deals
How long should you fix a rate for?
Without a crystal ball there’s no right answer to this question. For example, if you fix your rate for ten years and mortgage rates rocket over the next decade, you would be relatively better off, but if they went down you'd be stuck.
Lenders generally try to factor in any rate rise into their offers, so the longer you fix for, the higher the rate tends to be.
Also think about fixing your mortgage rate in regards to your personal circumstances and ignore (to a degree) the market movements. Just think about your ingoings and outgoings and if anything might change in the future.
Two to three years
Two year fixed rate deals generally offer the lowest rates of any mortgage fixed deal. The advantage is also flexibility that you won’t be tied in for too long.
But be wary of the booking or arrangement fees if you’re planning to switch every few years, and don’t get enticed in by the lowest initial rate.
If you like to plan your finances on a medium to long term basis, a five year fixed rate could be a good choice.
You will have security of knowing your payments will be set at a fixed level for several years, but you do run the risk of being tied into a rate that’s relatively high if rates fall again.
Fixing your mortgage rate for a decade is not for everyone, but if you like to plan for the long term and are not worried about flexibility, it could be worth considering.