Bank of England Base Rate

Let us explain below how your mortgage interest rate is determined, how it might change during your borrowing term, whom is responsible for adjusting it and the history of how base rates have fluctuated over the last three hundred years.

What Is The Base Rate?

As is the same in many other countries the national bank is in control of the base rate of interest. The rate of interest and supply of money, literally how much is printed, are the two principle methods the bank uses to help keep the economy stable. The UK national bank is known as the Bank of England and it has been performing this role for the past 300 years.

As well as lending money to individuals and businesses the bank also lends money to other financial institutions. The short term rate of interest for such loans is known as the Bank of England Base Rate. Because of the large sums of money involved in such transactions the base rate of interest can influence the bond market, inter-bank lending and even the stock market.

Since the principle supply of money in the UK is controlled and governed by the Bank of England the interest rate they choose has a knock-on effect to every other financial institution. High street banks, such as Lloyds TSB, HSBC and Natwest calculate their lending and interest rates based on the base rate. This is turn has an effect of the overall economy since money is either cheaper (low interest rate) or more expensive (high interest rate) to borrow and repay. It is worth noting that the highest and lowest interest rates have occurred in recent time. In November 1979 the base rate reached a massive 17%, compared to the lowest of all time in March 2009 - a tiny 0.5%.

How Is The Base Rate Decided?

In the UK, nine people form the Monetary Policy Committee. This committee will meet regularly to decide if the base rate needs to be changed.

Each committee member is appointed based on their expertise in economics and financial practices. They hold the position for a fixed period of time, after which they resign and new members can be appointed. The nine members always include the Governor and Deputy Governor of the Bank of England.

The decision to change the base rate of interest is decided by a vote with each member having an equal say - there are no special privileges for being the Governor. Having nine members ensures that there is never a tie-break situation and the outcome is considered a reflection of expert opinion.

How Frequently Does The Base Rate Change?

In order to keep stability in the UK economy the MPC meets every month to decide if a change in the base rate is appropriate. This allows the Bank of England to respond to fluctuations in the financial markets in a controlled and considered manner. The meetings are normally scheduled to take place on the first Wednesday and Thursday of each month with the outcome made public on the Thursday midday.

What is LIBOR?

The London Inter-Bank Offered Rate or LIBOR has been in place since the 1980's. It is an arrangement between London's commercial banks which standardises the interest rate at which they can lend each other money.

Over 220 banks from 60 different countries are signed up to the LIBOR agreement. This gives the interest rate significance when looking at the worldwide economy.

The LIBOR rate is published daily and usually tracks similarly to the Bank of England base rate. During more volatile economic times the LIBOR rate has been known to differ by as much as several percentage points. A few lenders link their mortgage rates directly to the LIBOR rate, however the most common approach is that each individual lender will decide their own mortgage interest rate offering. This gives each lender the flexibility to adjust their interest rates on their own schedule and with their own terms.

How Is My Mortgage Affected By The Base Rate?

This almost entirely depends on the type of mortgage you have and the terms your lender has set. As a general rule:

Tracker Mortgages will follow the Bank of England Base Rate. Your mortgage rate will either go up or down by the same amount as the base rate. In practice this might not have a direct effect on your next mortgage payment, but it's worth knowing that the interest charged on your mortgage will be changed straight away.

Variable Rate Mortgages including discounted variable rate mortgages will change at the discretion of the lender. The lender will have their own standard variable rate (SVR) which they can choose to change independently of the Bank of England Base Rate. Depending on the financial involvements of the lender they may choose to delay any increase or decrease their SVR for commercial reasons. For example the lender may choose not to increase their SVR, despite a rate in the base rate, in order to remain more competitive in the market and hopefully new customers. Ultimately the base rate of interest will "catch-up" to the base rate but in practice the borrower is better shielded from minor fluctuations in the base rate.

Fixed Rate Mortgages It is common practice for a lender to offer fixed rate mortgages to it's customers for both a fixed rate and fixed time period - for example fixed at 4% for the first two years. During this time period the customer is completely shielded from any fluctuations in the base rate of interest. After the fixed time period has elapsed the mortgage rate typically then becomes either a tracker or variable rate mortgage. Fixed rates are usually offered to new customers and first time buyers but sometimes customers who are re-mortgaging can also receive the benefits of a fixed rate mortgage.

What Next?

Now that you have a better understanding of how your mortgage interest rate is calculated we'd highly recommend that you speak to an unbiased mortgage adviser.

Just fill in this short form and a qualified mortgage adviser will contact you to answer all of your questions, give you bad credit mortgage advice, and get you on your way to buying your home.

A mortgage adviser is able to give expert advice on the best mortgage deals available in the UK. They will also be able to answer any complicated questions that you may have regarding mortgage rate calculations and also provide some insight into the current direction of the base rate.