The Bank of England’s Base Rate has been in the spotlight in recent years – dropping to an all-time low of 0.1% in 2020 before rising to a 16-year high of 5.25% in 2023. Many homeowners have felt the effects of this volatility through their mortgage rates. But what exactly is the Base Rate and why does it affect mortgage holders? Understanding the Base Rate can help you make important decisions regarding your mortgage. In this guide, we explain how the Base Rate works, how it affects mortgage rates, what else affects mortgage rates, what the Base Rate predictions are for 2025, and much more!
What is the Base Rate?
The Base Rate, also known as the Bank Rate, is the interest rate that the Bank of England (BoE) charges when it loans money to commercial banks. The Base Rate can change often, so to find out what the current Base Rate is in the UK, please visit the Bank of England’s official webpage.
How Does the Base Rate Work and What’s It For?
The Bank of England uses the Base Rate as a way of controlling inflation or stimulating the economy. If inflation is rising too quickly, the Bank of England may raise the Base Rate to slow down economic activity and reduce demand, which can help to curb price increases (bring down inflation). However, if the economy is sluggish, the Bank of England may lower the Base Rate to encourage borrowing and spending, which can boost economic activity.
Let’s look at this in a bit more detail. If the Base Rate increases, commercial banks are forced to increase the interest rates they charge on mortgages and loans, making borrowing more expensive for businesses and consumers. However, saving becomes more attractive, as banks also increase the interest rates they offer on savings accounts. Together, these factors help to slow down business and consumer spending and increase saving, which should reduce inflation over time. Conversely, if the Base Rate decreases, the opposite happens. Mortgages and loans become cheaper and saving accounts become less attractive. This encourages businesses and consumers to spend more and save less, which should stimulate economic growth.
How Does the Base Rate Affect My Mortgage?
As mentioned above, when the Base Rate increases, mortgage rates tend to go up, and when the Base Rate decreases, mortgage rates tend to come down. This is because the Base Rate dictates how expensive it is for banks to borrow money, which in turn influences how expensive it is for them to lend that money.
However, how the base rate affects your particular mortgage depends on what product you have. If you are on a variable or tracker mortgage, your rate will change in line with the Base Rate. You can learn more about variable mortgages by reading our guide, ‘What is a Standard Variable Rate (SVR) Mortgage?’, and tracker mortgages by reading our guide, ‘What is a Tracker Mortgage and Should I Get One?’
If you are on a fixed-rate mortgage, your rate won’t immediately be affected. This is because, as the name suggests, your rate is fixed until the end of your introductory period. At this point though, you will be affected by any change to the Base Rate since taking out your mortgage, as you’ll need to remortgage at current market rates or move onto the Standard Variable Rate. You can learn more about fixed-rate mortgages by reading our guide, ‘What is a Fixed-rate Mortgage and Should I Get One?’
Is the Base Rate Going to Go Down in 2025?
The Base Rate has already been cut twice in 2024 and further cuts are expected this year and/or in 2025. However, the exact timing and magnitude of these cuts remain uncertain. The Bank of England will look at inflation, the strength of the economy, and global economic conditions when making decisions regarding the Base Rate. As we’ve learnt in recent years, all of these factors can be volatile, making it hard to predict Base Rate movements accurately.
Should I Wait for the Base Rate to Go Down Before Remortgaging?
If you’re approaching the end of a fixed-rate or tracker period, the general advice is to lock in a new deal as soon as possible. This will protect you from being moved onto the higher Standard Variable Rate (SVR). If rates do fall before your new mortgage kicks in, we’ll switch you to a better deal if one’s available, meaning you should have nothing to lose by remortgaging at today’s rates. If you’re already on the SVR, we also recommend seeing if you can save money by switching to a better deal. No matter what your mortgage situation is, feel free to speak to one of our friendly advisors to find out what deals are available to you and when to remortgage.
What Else Affects My Mortgage Rate?
Aside from the Base Rate, there are several other factors that influence mortgage rates in the UK. Let’s have a look at these below.
- Inflation. As mentioned earlier, rising inflation can cause the Base Rate to increase. This means that inflation can indirectly affect mortgage rates.
- Economy. Likewise, if the economy is sluggish, the Base Rate may increase, meaning the state of the economy can also indirectly affect mortgage rates.
- Property Market. The state of the UK property market can influence mortgage rates. If demand for property is high, lenders may increase rates as they should have little difficulty lending the money they have. If demand is low, lenders may decrease rates to attract borrowers.
- Swap Rates. These are interest rates that lenders pay to financial institutions to secure funding for a set period of time. As such, they are essentially future interest rate predictions set by financial institutions, and they can heavily influence current pricing strategies and rates.
It’s worth bearing in mind that these are the factors that influence mortgage rates generally but there are other factors that may influence the exact rates available to you. These factors include your Loan-to-Value, affordability, credit score, and age.
The Bottom Line
The Base Rate is the interest rate that commercial banks have to pay when they borrow money from the Bank of England (BoE). The BoE has complete control over the Base Rate, and being so high up in the lending chain, it influences the rates that lenders set for consumers and businesses. This is true for both lending rates (mortgages, loans, credit cards) and savings rates.
When the Base Rate increases, borrowing and spending becomes less attractive and saving becomes more attractive. When the Base Rate decreases, borrowing and spending becomes more attractive and saving becomes less attractive. Having such far-reaching effects means the BoE can use the Base Rate to keep inflation under control or stimulate the economy. If inflation needs to be brought down, the Base Rate can be increased. If the economy needs to be stimulated, the Base Rate can be decreased.
The general advice for anyone approaching the end of a fixed-rate or tracker period is not to try and wait for the Base Rate to drop. Doing so may lead to you being switched to the Standard Variable Rate, which tends to be the highest rate you can be on with your lender. If you’re unsure whether now is the right time to remortgage, speak to us today. We’ll be able to see what rates are available to you from across the market and identify the right time for you to switch.
At Michael Usher Mortgage Services, we’ve been helping people throughout Surrey, Hampshire and Berkshire for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will depend on your circumstances but will be agreed with you before proceeding.
