What is the Bank of England Base Rate and why does it change?

You may have seen headlines in the news recently commenting on the effect of the Bank of England Base Rate on mortgage rates, and wondered ‘how does the base rate increase affect my mortgage?’

If so, you’re not alone, with many mortgage borrowers or hopeful first time buyers pondering how the increasing base rate will affect their monthly payments or even their chances at getting a mortgage.

In order to understand how potentially fluctuating interest rates affect you and your mortgage, it’s helpful to understand a bit more about the Bank of England Base Rate, what it is, how it is ‘set’ and by whom.

First let’s look at what we are talking about when we discuss ‘the base rate’.

The Bank of England is responsible for setting the base rate, which is the interest rate at which commercial banks can borrow money from the central bank. When the base rate increases, it becomes more expensive for banks to borrow money, and this can have a ripple effect throughout the economy.

There are several reasons why the Bank of England may choose to increase the base rate:

1.      Inflation: One of the main reasons why the Bank of England may increase the base rate is to control inflation. If inflation is rising too quickly, the Bank of England may raise interest rates to slow down spending and reduce demand for goods and services.

2.      Economic growth: If the economy is growing too quickly, the Bank of England may increase the base rate to cool things down and prevent overheating. This can help to prevent bubbles in asset prices, such as housing or stocks.

3.      International factors: The Bank of England may also consider international factors, such as changes in the global economy or fluctuations in exchange rates. If these factors are having an impact on the UK economy, the Bank of England may adjust the base rate accordingly.

As we can see, an increase in the base rate can have both positive and negative effects. On the one hand, higher interest rates can help to control inflation and prevent the economy from overheating. On the other hand, higher interest rates can make borrowing more expensive for businesses and borrowers within the general public such as home-buyers, which can slow down economic growth.

If you’re wondering how the recent changes in base rate will affect your current mortgage or your ability to get a mortgage in the future, it may be worth having a chat to your mortgage broker. They will be able to look at your situation as an individual and determine the best way forward for you and your mortgage.