The Bank of England base rate can affect everything from your mortgage to the rates applied to credit cards – we round up everything you need to know following the latest announcement
The Bank of England has held interest rates at 5.25% for the fifth time in a row – but what does this mean for your money?
The base rate is what the Bank of England charges other lenders when they borrow money, which then influences the interest you’re charged as a customer. So when the base rate is higher, the cost of borrowing becomes more expensive.
This can affect everything from your mortgage to the rates applied to credit cards. But there is one positive – savings rates have massively improved over the last year or so, due to higher interest rates. The base rate is currently at its highest level in 16 years.
Most financial analysts had anticipated the base rate would be held again, despite inflation falling to 3.4% in February. The Bank of England is trying to bring inflation down to its 2% target. The majority of the Bank’s Monetary Policy Committee (MPC) – who decide on the base rate – voted to keep it the same even though inflation had dropped.
Bank of England governor Andrew Bailey said: “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there. We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”
How does it affect my mortgage?
The effect on your mortgage payments depends on the type of deal you’re on. Those who have a tracker mortgage see their monthly payments go up and down with the base rate. This means they get more expensive when the base rate rises and become cheaper when it drops. As the base rate has been held, this means you wouldn’t see any change today.
Standard variable rate (SVR) mortgages are typically the most expensive and it is normally down to your lender to decide when they put up rates. SVR mortgage holders normally receive news on if their mortgage is going up a few days after any base rate change has been announced. You are usually placed onto an SVR mortgage when your current deal ends
If you are on a fixed mortgage rate, you pay the same rate each month for the term of your contract. This means you are protected from any rises during your deal. But when you come to remortgage, you will likely find you’re locking into a new rate that is more expensive than your existing deal.
Alice Haine, finance analyst at Bestinvest by Evelyn Partners said that whilst mortgage rates eased dramatically in January as lenders “went to war in a bid to secure new business and retain existing clientele” they edged back up again in February with many lenders repricing their products due to the uncertainty of the Bank’s base rate.
She said: “Hints that interest rate cuts are coming down the line may hopefully spur lenders into rolling out more attractive mortgage offers once again – something that would benefit first-time buyers and those looking to refinance alike.
“While those emerging from cheap deals may be stung with higher repayments, at least the pain won’t be quite as bad as it could have been if their product had expired last summer. Those signing up for a fresh deal would be wise to consult a mortgage broker to help them secure the best offer possible. Remember, buyers can lock in a deal up to six months before they need it to start and can then update their rate as many times – provided better options come online – as they need to before the product term begins.”
How does it affect my debts?
Credit cards have become more expensive over the last year, with the average purchase APR now sitting at 34.7%. This means you’ll pay more to borrow if you take out a new card now.
Credit card rates are normally variable, which means they can change over time. There are some that are linked to the base rate, which does mean they are affected by any changes. If your rate is due to change, your card provider should give you 30 days’ notice.
Interest rates on personal loans and car financing are normally fixed – but do check the terms and conditions of your agreement to be sure. Again, the rates on new loans are higher now compared to last year, meaning it is now more expensive to borrow.
How does it affect my savings?
There has been a big comeback in savings rates – and the top-paying accounts still pay above inflation. However, fixed rate accounts have edged down due to the Bank of England having paused its round of rate hikes. Savers should act fast to get the best rates.
The best easy-access rate right now is 5.1% from Cynergy Bank, or the best-paying fixed rate account is from MBNA which pays 5.27% for one year. Regular saving accounts pay even more than this – but you’re normally limited to how much money you can save each month.
For example, First Direct has a linked saver which pays 7% fixed for one year – but you can only deposit up to £300 each month. Always make sure your savings are protected by the Financial Services Compensation Scheme (FSCS) which covers up to £85,000 of your cash.
Myron Jobson, senior personal finance analyst, at interactive investor warned that the top deals for savings rates may continue to disappear as the Bank of England edges its way forward to a interest rate cut. They said: “The simple message for savers is: act quickly to secure the best deals before they vanish. High-interest rates continue to have ripple effects on personal finances. Therefore, it remains important to stay on top of your finances and make the necessary adjustments to maintain financial resilience.”
