What is the Base Rate?
The base rate is decided in the UK by the Bank of England’s Monetary Policy Committee. It is continually discussed and reviewed with the stability and best interests of the economy in mind. The rate is the rate at which the Bank of England, which is the country’s central bank, charges on its own lending to financial organisations.
The base rate therefore affects interest rates in general throughout the country’s finances. If the best rate goes up, interest rates will tend to also, and similarly they will go down when the base rate does.
These variations affect both lending and saving. Although having a low interest rate on your mortgage may sound great for your monthly payments, it also means that any savings you have will accrue only a small rate of interest. A low base rate also means the economy is not growing at a fast rate, which means that your property may not appreciate in value at the rate that it might have previously.
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Mortgage and Remortgage Rates
The extent to which your mortgage or remortgage payments will be affected by base rate changes depends on the particular deal you have.
If you have a fixed rate mortgage, your rate will stay the same for a set period outlined in the mortgage agreement. After that period it will likely revert to the lender’s standard variable rate of interest, which is generally affected by the base rate, although not necessarily tied to it. The lender chooses their own standard variable rate and how it affects you is therefore down to your own lending institution.
Tracker rates are most directly affected by the Bank of England base rate, as they are set at a certain level normally above the base rate. This means that increases and decreases to the base rate will necessarily affect your mortgage payments both positively and negatively. Bear in mind also that a tracker rate may only apply for a certain period of your mortgage or remortgage, so that your rate may then switch to the lender’s standard variable one.
Thinking about the current interest rates can help you to make the most of your assets. For example, a low interest rate means having savings sitting in an account that are not accruing much interest. This is what tempts some people to consider using their savings in some way to assist with their mortgage, as the interest rates your mortgage is costing you will likely be higher than those your savings are earning.
You should be sure to take sound financial advice however when making these decisions. If you’re thinking about a remortgage, bear in mind how the rates will affect your finances in the long and short term.