As you budget for the new year, it’s important to take base rates into account, especially if you’re on a variable rate mortgage as it could mean your payments change on a month-by-month basis. In this article, we’ll go through exactly what the Bank of England base rate is and how it could impact your mortgage.
What is the Bank of England base rate?
Put simply, the base rate is the interest rate the Bank of England charges other banks and lenders when they borrow money. This rate therefore influences what interest rates lenders put on mortgages, credit cards and loans.
The base rate rises and declines to help control inflation in the UK. The idea is that when interest rates are higher, people will be spending more on loans and mortgages, and have less money to spend on other things. This means that businesses tend not to raise their prices to attract more customers, causing inflation to fall.
The Monetary Policy Committee (MPC) at the Bank of England meets every six weeks to set the base rate, which may go up or down depending on the current economic situation. At the moment, the inflation target is 2% and reaching that is the MPC’s main goal.
What is the current base rate?
At the moment, the base rate is 4.75% but this is expected to change on 6th February. The current rate is predicted to decrease to around 3.7% by the end of the year.
How do base rates impact mortgages?
As mentioned above, the base rate influences all other interest rates, which includes your mortgage. When you take out a mortgage, the lender will charge you a mortgage interest rate, which is essentially a percentage fee you pay on top of the loan. How much changes in base rates impact your mortgage payments depends on what type of rate you have.
Standard variable rate (SVR) mortgage
A standard variable rate is set by the lender but as it’s variable, it can change, meaning you may see increases or declines in your monthly bill. If this happens, your lender should send you a letter to let you know what you can expect to pay.
Most SVR mortgages don’t include an early repayment charge (ERC), which is an added charge if you overpay or leave your mortgage early. Not only does this mean that if the rates go up, you can move to a different rate without having to pay an exit fee, you can also pay off your mortgage quicker if you have the funds available.
Tracker rate mortgage
A tracker rate mortgage rises and falls in line with another interest rate, which is normally the Bank of England’s base rate plus a bit extra. It lasts for a set period of time, typically between two and five years, before reverting to an SVR.
If your tracker rate drops, you could take advantage of this and overpay on your mortgage, reducing the amount of interest you pay over time. Although there is an ERC, you can pay up to 20% of your outstanding balance each year before this is charged.
Fixed rate mortgage
While on a fixed rate mortgage, your payments have a fixed interest rate for a set period of time, normally between two and five years. This means that no matter how much the interest rate fluctuates, you’ll pay the same amount every month.
A fixed rate does make it easier to budget but if your lender’s mortgage rates fall, you may end up paying more over time. Similar to the tracker rate, there is an ERC but you can make overpayments of up to 20% of your balance each year before any fees are incurred.
Discounted variable rate mortgage
With a discounted variable rate mortgage, your mortgage interest rate follows the same pattern as the SVR so can fluctuate throughout the year. However, it is at a set percentage below the SVR. For example, if your lender’s SVR is 4% and you have a discount of 1%, you’d pay 3%. If the SVR increased to 5%, your rate would then increase to 4%.
Much like tracker rate and fixed rate mortgages, discounted variable rate is for a set period of time, normally around two to five years. There is an ERC but it is lower compared to fixed rate mortgages so if you do decide to overpay, you can keep charges to a minimum.
Tips to deal with rising mortgage rates
If you are struggling to pay your mortgage, especially if interest rates increase, there are a number of things you can do to reduce the financial impact. These include:
- Overpaying before the rate increases
- Switching your mortgage deal
- Downsizing your home
- Remortgaging your home
- Extending the mortgage term
- Contacting MoneyHelper for free debt advice
- Applying for Breathing Space.
Here at MoneyPlus, our expert team is on hand to offer you advice on debt solutions available such as Breathing Space or a Debt Management Plan (DMP). Simply get in touch with us today and we’ll be happy to discuss your options.
