This guide explains the rates that your mortgage rates are based on, how often they change, who decides on them, and what they were in history.
In the UK, as with most modern economies, a central bank has responsibility for stabilising the currency and money supply, and controlling short term interest rates. The Bank of England has been performing this role since the 17th Century.
The Bank of England's Base Rate is a short-term interest rate at which it lends to other financial institutions. This influences the stock market, the bond market and the rate at which other banks lend to one another.
Because the Bank is the ultimate provider of cash to the banking system, its choice of interest rate for supplying these funds has a knock-on effect throughout the financial system. When the Bank changes its dealing rate, commercial banks change their own base rates from which lending and savings rates are calculated.
At its highest point, in November 1979, the Bank of England base rate reached 17.00%. The base rate reached its lowest point in March 2009, when it was reduced to 0.5% – lower than any previous base rate in the Bank of England's 300 year history.
The Bank of England has a Monetary Policy Committee (MPC) that meets together to decide on the Base Rate.
The committee consists of nine persons, each appointed for a fixed period of time, after which they can be replace or re-appointed. They are chosen based on their expertise in different fields of economics and monetary policy. Among the nine are the Governor and Deputy Governor of the Bank of England.
The MPC's decisions are taken by vote. Each member has one vote, so there are no special powers associated with governing the committee – the decisions are a reflection of the balance of expert opinion.
If the Bank changed its rate too frequently, there would be instability in the financial markets. However, in order to respond to changing economic circumstances, the Bank does need to periodically review its interest rate.
Therefore the Monetary Policy Committee meets on a monthly schedule to decide whether a change in the Bank of England base rate is required. The meetings usually occur on the first Wednesday and Thursday of the month, with the decision made public on the Thursday around noon.
LIBOR stands for the London Inter-Bank Offered Rate. It has been in place since the 1980s as a way of standardising the rate at which London's commercial banks are lending each other money.
Over 220 banks from over 60 nations are signed up to the LIBOR arrangement, which means that LIBOR rate is an important reference interest rate across the world.
Unlike the Bank of England base rate, LIBOR is published daily. Usually its movements follow a similar trend to the overall movement of the Bank of England base rate. However, during times of economic volatility it can differ by a margin of several percentage points.
Some mortgages are directly linked to the LIBOR rate, as opposed to the Bank of England Base Rate. More importantly though, as individual mortgage lenders can change their rates more frequently than the Bank of England's monthly base rate alterations, in practice LIBOR has an indirect effect on most mortgage rates available to British borrowers.
Borrowers on fixed rate mortgages are insulated from changes in the Bank of England Base Rate during their fixed-rate period. However, the fixed interest rates on offer to new borrowers will be influenced by expected base rate movements.
Tracker mortgages are directly linked to the Bank of England base rate. When the base rate goes up or down, your mortgage interest rate will change by the same amount. The next monthly mortgage payment might not necessarily change, but the amount of interest being charged will be adjusted straight away.
Variable rate mortgages (including the discounted kind) are based on a lender's own Standard Variable Rate. When the Bank of England changes its rate, the lender doesn't have to react straight away. It can decide when, or whether, to change its SVR at all. So the Base Rate can affect variable-rate mortgage customers, but not as directly as it affects tracker mortgage customers.
Now that you understand more about the Bank of England Base Rate, if you would like help and advice choosing a mortgage, fill in our short enquiry form to speak to an unbiased mortgage adviser. They can offer expert advice on current UK mortgage deals, and you can fire any complicated questions about base rates in their direction too!
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