What are interest rates and why are they so important?
You will see interest rates shown as a percentage. For example; 3%. This would mean that if you had £100 savings then the interest you would get would be £3. So a year later you would have £103 in your account.
Who decides what interest rate I pay?
There are numerous different factors involved in the making up of your interest rate. One is called the ‘Bank rate’ (which we’ll come to in a moment). Other factors could be that a lender are trying to increase their client numbers or ‘sales’. To do this they will offer incentives and promotions to people who save or borrow with them. The makeup of the decision in your interest rate is a vast topic and too great for us to cover here. For now, we will stick with the basics.
What is the Bank of England ‘Base Rate’?
The so called ‘base rate’ has several other known names. These include ‘bank rate’, the BOEBR or even sometimes just ‘the interest rate’. The Bank of England are the bank which sets the ‘base rate’, they do this via the MPC (Monetary Policy Committee). They vote whether to alter the base rate, usually monthly. The vote to see whether they amend the rate is part of Monetary Policy to hit targets set by the Government.
What does a change in the bank rate mean?
The bank rate influences the rate which you and I pay for our mortgage, for example if the bank rate were to go up we would normally expect to see mortgage rates increase. (Bear in mind that the rate a bank charges for their mortgage product isn’t JUST affected by the ‘bank rate’). Lenders need to charge more for a mortgage interest rate than they pay out for in savings rates. But you wouldn’t expect to see any bank paying less than 0% on savings or no-one would save with them…
visual representation of the ‘bank rate’ since Jan ’06.
Do Interest Rates Really change?
Yes, we have experienced a level of stability in our interest rates, but looking back through history you can see that interest rates have been slightly more volatile. For example;
- In 1979 the Highest Ever Base Rate was at 17.0%
- In 2016 the Lowest Ever Base Rate was at 0.25%
When we decide about which mortgage product best suits you, we will consider what could possibly happen to the Bank of England Base Rate in the future.
If you would like to discuss more about Interest Rates why not book your free consultation now.