The Bank of England Base Rate.

Interest rates

The Bank of England's official interest rate, commonly called the Bank Rate or base rate, influences the cost of borrowing and the return available on savings throughout the UK.
Changes in the Bank Rate can affect mortgage payments, but the impact depends on the type of mortgage you have. Tracker mortgages usually respond directly; individual lenders set standard variable rates, and fixed mortgage rates are influenced more by financial market expectations about future interest rates.

Who Sets the Bank Rate?

Bank Rate is set by the Bank of England's Monetary Policy Committee, usually known as the MPC.
The committee has nine members. Each member votes on what the Bank Rate should be, and the decision is reached by majority vote. If the votes are evenly divided, the Governor has a casting vote.
The MPC normally announces its decision eight times each year. Minutes explaining the votes and reasoning are published with each decision.
The Bank's principal monetary-policy objective is to maintain price stability. The Government currently sets an inflation target, and the MPC considers inflation, economic growth, employment, wages and wider financial conditions when deciding whether Bank Rate should rise, fall or remain unchanged.

Tracker Mortgages

A tracker mortgage has an interest rate linked to an external rate, most commonly the Bank of England Bank Rate.
For example, a mortgage may be set at Bank Rate plus 1%. If the Bank Rate is 4%, the mortgage rate would be 5%. If the Bank Rate falls to 3.75%, the mortgage rate would normally fall to 4.75%.
The precise effect will depend on the mortgage terms. Some tracker mortgages contain:

• A minimum rate or floor below which the mortgage cannot fall;


• A delay before a rate change is applied;


• An introductory tracker margin that later changes;


• Early repayment charges; or


• A maximum rate or cap.

Borrowers should check their mortgage offer rather than assume every tracker will change immediately or by the same amount as Bank Rate.

Standard Variable Rate Mortgages

A standard variable rate, or SVR, is set by the mortgage lender. It is not normally required to follow the Bank Rate by a fixed amount.
When the Bank Rate rises, lenders frequently increase their SVRs. When the Bank Rate falls, they may reduce their rates, but they do not necessarily have to pass on the full reduction or make the change immediately.
Many borrowers automatically move onto their lender's SVR when an introductory fixed, discounted, or tracker deal ends.
SVRs are often higher than the rates available on new mortgage deals. However, they commonly offer greater flexibility and may have no early repayment charge.

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate and monthly payment remain unchanged for an agreed period, commonly two, three, five or ten years.
A change in Bank Rate will not normally alter payments during the fixed period. However, the borrower may face a different rate when the deal ends, and they need to remortgage or transfer to another product.
Fixed-rate mortgages provide certainty, but they can also involve:

• Early repayment charges;


• Arrangement or product fees;


• Limits on penalty-free overpayments;


• A higher initial rate in return for longer-term certainty; and


• Automatic transfer to thelender'ss SVR when the fixed term ends.

A borrower should compare the overall cost of a deal rather than concentrating only on the advertised interest rate.

Why Can Fixed Mortgage Rates Change Before Bank Rate?

Fixed mortgage rates are not determined solely by the Bank Rate in force today.
Lenders consider the cost of obtaining money for the period over which they are offering the fixed rate. This is influenced by wholesale funding markets and interest-rate swap rates, which reflect market expectations about the future path of Bank Rate.
As a result, fixed mortgage rates can:

• Fall before the Bank of England announces a rate cut;


• Rise even though the Bank Rate has not changed;


• Remain broadly unchanged following an expected MPC decision; or


• Move sharply when inflation or economic data surprises the market.

For example, if markets expect the Bank Rate to fall substantially over the next two years, two-year fixed mortgage rates may begin to fall before the first reduction occurs. If inflation then proves stronger than expected, swap rates and fixed mortgage pricing may rise again.

What Else Affects Mortgage Rates?

Mortgage lenders consider a wide range of commercial and economic factors, including:

• Expected inflation and interest rates;


• Swap rates and wholesale funding costs;


• Competition between lenders;


• The lender’s demand for new business;


• The borrower’s deposit or available equity;


• The loan-to-value ratio;


• The borrower’s credit history and affordability;


• The type and condition of the property;


• The length and type of mortgage; and


• The lender's operating costs and required profit margin.

This explains why two borrowers applying at the same time may be offered different rates and why the difference between Bank Rate and mortgage rates can widen or narrow.

Discounted Variable-Rate Mortgages

A discounted mortgage offers a reduction from the lender's SVR for an introductory period.
For example, a deal might offer the lender's SVR minus 1.5% for two years. If the lender changes its SVR, the mortgage rate will usually change as well.
Unlike a tracker mortgage, the rate is linked to the lender's own variable rate rather than directly to Bank Rate. The lender therefore has greater control over when and by how much the rate changes.

Should You Choose a Fixed or Variable Mortgage?

No mortgage type is automatically suitable for every borrower.
A fixed rate may be appropriate for someone who needs predictable monthly payments and would find an unexpected increase difficult to manage. A tracker or variable deal may appeal to someone who can tolerate changing payments, expects rates to fall or wants greater flexibility.
Factors to consider include:

• How much payment certainty you require;


• Whether your budget could absorb an increase;


• How long do you expect to keep the mortgage?


• Whether you may move home or repay early;


• The product fee and total cost;


• Early repayment charges;


• The ability to make overpayments; and


• The rate at which the mortgage will revert when the deal ends.

Choosing a mortgage solely because of a prediction about future interest rates can be risky. Even professional economic forecasts frequently change as new information becomes available.

Preparing for the End of a Fixed Deal

Borrowers should check when their existing mortgage deal ends and what rate will apply afterwards.
It is generally sensible to begin reviewing the available options several months before the fixed or introductory period expires. Some lenders and brokers allow a new rate to be reserved in advance while still permitting the borrower to switch to a better product before completion, if the terms allow.
Check:

• The date your present deal ends;


• The lender’s current SVR;


• Any early repayment charge;


• Whether your lender offers a product transfer;


• The current value of the property and loan-to-value ratio;


• Product fees and legal or valuation costs; and


• Whether your income or circumstances have changed.

If You Are Struggling with Mortgage Payments

Contact your lender as early as possible if you are concerned about meeting your payments. Waiting until payments have already been missed can reduce the available options.
Depending on the circumstances, the lender may discuss:

• Changing the payment date;


• Extending the mortgage term;


• A temporary switch to interest-only payments;


• A temporary payment arrangement;


• Capitalising arrears; or


• Moving to another available mortgage product.

These options can reduce payments in the short term but may increase the total interest paid or extend the period of the mortgage. The consequences should be understood before agreeing to a change.

Obtaining Mortgage Advice

Mortgages are significant, long-term financial commitments. Interest-rate forecasts should not be treated as certain, and the lowest advertised rate is not always the least expensive product after fees and other conditions are considered.
A regulated mortgage adviser can compare appropriate products and explain the costs, risks and restrictions. Check whether the adviser considers mortgages from across the market or only from a limited group of lenders, and ask how the adviser will be paid.
A solicitor will deal with the legal work involved in purchasing, selling or remortgaging the property, but will not usually provide regulated mortgage advice unless separately authorised to do so.

Finding a Mortgage or Property Law Solicitor

A conveyancing or property law solicitor can advise on the legal aspects of a mortgage, including the lender's requirements, ownership arrangements, mortgage deeds, restrictions affecting the property, and completion of the transaction.
To find a solicitor, use the search facility at the top of this page and select the relevant area of law.