What is the Bank of England Base Rate and How Does It Affect Me?

Rising interest rates have been all over the news in recent weeks. But what does that really mean? Most of us aren’t economists, so it’s not always clear what these massive decisions mean or how they will impact us.

However, understanding how a rise in the Bank of England base rate affects us all is important. Doing so can help you make key financial decisions at the right time to make your funds go further. So, what exactly is the Bank of England base rate, and how does it impact you, your mortgages, and your credit cards? 

In this blog, we’ll dive into these topics so you can navigate financial decisions wisely. Let’s get started!

What is the Bank of England Base Rate?

The Bank of England base rate refers to the interest rate paid to banks that hold their money with the Bank of England, the UK’s central bank. In turn, the Bank of England base rate affects the rate that banks charge their customers.

When the BOE interest rate rises, it affects banks and everyone who uses bank products such as loans, mortgages, or credit cards. On 16 June, the Bank of England raised interest rates from 1% to 1.25%. Why did they do that? 

Why Has the Bank of England Raised the Base Rate?

The Bank of England doesn’t raise interest rates on a whim. The Monetary Policy Committee meets every eight weeks to determine whether any changes to the interest rate are needed. The manipulation of a central bank’s interest rate is also known as ‘monetary policy.’

So what prompted the MPC to raise the BOE interest rate? Well, there are a number of possible reasons:

• Consumer spending has increased since COVID-19 became more controlled, but supply-chain woes have lingered on. 
• Oil and petrol prices have risen across Europe. 
• A gap between the number of job vacancies and the number of workers who can fill them has strained businesses. 

These factors—and many others—have contributed to rising costs of living and inflation. To combat this, the BOE interest rate was raised. On a grand scale, the impact of the interest rate hike increases the cost of borrowing and encourages people to spend less and save more. But how does this actually impact you?

How Rising Interest Rates Impacts Your Mortgage

If you have a mortgage, there’s a good chance that you could be affected by the BOE interest rate increase, even if it’s not for a few years.

Households with fixed-rate mortgages aren’t likely to see much impact from the Bank of England base rate increase right away, as their interest rates do not change until the term is finished. However, fixed-rate mortgages typically have initial terms lasting between 2-10 years, so if your term is coming to an end, your new fixed interest rate could be higher.

Households with tracker mortgages and variable rate mortgages will see increases to their monthly repayment because the interest rate on those mortgages is directly tied to the Bank of England’s base rate.

It’s critical to be aware of how rising interest rates can affect you, as it could lead to an increase of as much as £1,000 in mortgage payments over the course of a year. The Bank of England has indicated that interest rates could continue to rise if it’s necessary to curb inflation at 2%.

If you have a mortgage, you may want to take the time to consider how an interest rate increase will impact you, and whether you have options for renegotiating its terms.

How Rising Interest Rates Impacts Your Credit Cards and Loans

Consumer credit cards and loans are impacted by Bank of England base rate increases in the same way variable-rate mortgages can be affected. Most credit cards in the UK have a variable annual percentage rate (APR), so as the Bank of England’s Base Rate increases, your credit card’s APR will also rise.

It’s important to be aware of this as you plan your budget. If a rate increase catches you off guard and you miss payments, your credit score could suffer.

How Else Can a Rising BOE Base Rate Impact You?

The impacts of rising interest rates range so far and wide that we can’t possibly cover them all. Thankfully some of them will only have small impacts on your finances. There are a few other ways you could be impacted that you’ll want to pay careful attention to.

Renters May See Their Rent Increase

If your landlord has a mortgage on your building, they might be impacted by the rising interest rates. If this is the case, they might pass that expense on to their tenants, leaving you with a higher monthly payment.

While landlords typically can’t raise your rent more than once a year, it’s important to be prepared and begin planning in case you do end up seeing an increase to your rent.

Savings May Accumulate More Interest—But Be Careful

While banks will charge more interest on loans, mortgages, and credit cards, your savings will also typically accrue more interest.

This may sound like great news if you’re looking to save more, but keep in mind that inflation can outpace rising interest rates. That means despite your savings earning more interest, they may be losing their purchasing power.

Pave Helps You Build Credit in Turbulent Times

As the economy shifts and interest rates rise, having healthy credit is one way to protect and set yourself up for success. But building credit isn’t easy. That’s why we made the Pave app.

Pave helps people build credit the right way. Through bills monitoring, active credit building, and personalised credit fixes, Pave helps you build healthy credit and the habits to sustain it.

To see for yourself why hundreds of thousands of Brits have joined the Pave party, download the app from the App Store or Google Play today.