As the UK economy recovers following years of turmoil, and unemployment figures continue to fall, the prospect of an increase to the bank base rate is ever-more likely at some point in 2015 – but how would it affect you and are your ready for it?
If you are unsure of what the UK interest or bank base rate means and how might it affect you, here is a breakdown which might help.
What is an interest rate?
An interest rate is the cost of borrowing money - so, if you borrow £10,000 from a bank or building society you will have to repay this amount, plus the interest.
You also earn interest on your savings – so if you put savings into a bank or building society account, and you will earn interest on this money at the interest rate set by the bank or building society.
Who sets interest rates?
The UK interest rate (also known as 'base rate') is set each month by a group known as the Monetary Policy Committee (MPC). Its members include the governor of the Bank of England, two deputy governors, the executive director for markets, the Bank's chief economist, and four external members who are appointed by the Chancellor of the Exchequer.
Banks and building societies then set their own interest rates – on mortgage lending and savings - based on the set UK interest rate (base rate).
What is the UK interest rate (base rate)?
The current UK interest rate (base rate) as of January 2015 is 0.5%. The rate can be checked at any time on the Bank of England’s website: www.bankofengland.co.uk
My mortgage is based on a standard variable rate – what does that mean?
A Standard Variable Rate (SVR) is a type of variable rate which is set by the lender. The SVR is the lender’s “default” rate – without any limited deals or discounts attached. When a fixed, discounted or tracker rate comes to an end, the mortgage will usually revert to the lender’s SVR. A lender can raise or reduce its SVR at anytime. Standard variable rate tends to be influenced by changes in the Bank of England base rate, however a lender is not required to change it’s SVR in line with base rate changes.
What happens to my mortgage if the UK interest rate (base rate) increases?
If the UK interest rate (base rate) increases then many, but not all mortgage payments will go up.
If you have a fixed mortgage then your rate will not change for the duration of your deal. However, the rate your mortgage reverts onto at the end of the fixed rate deal may go up.
If you have a tracker mortgage that is linked to the Bank of England base rate, then your mortgage will increase in line with the increase in the UK interest rate (base rate). E.g. If your mortgage interest rate is 4.00% and the UK base rate goes up 0.5% then your interest rate will increase to 4.5%.
If you have a variable rate mortgage that is linked to the lender’s Standard Variable Rate (SVR), then it is likely that the interest rate on your mortgage will rise. However a lender’s SVR is not directly linked to the Bank of England base rate therefore changes to the SVR may not happen immediately.
What happens to my savings if the interest rate increases?
If the UK interest rate (base rate) increases then the rate on your savings account may change.
If you have a savings account with a fixed term interest rate then this will not change for the duration of the term.
If you have a Tracker savings account or savings bond which provides interest at a set interest rate above the UK base rate then you will receive more interest on your savings when the rate increases.
Other saving accounts should increase their interest rates over time, although this is at the discretion of the banks and building societies.;
If you would like to speak to someone at Teachers Building Society about your mortgage call 0800 378 669 or to speak to an advisor about your savings call 0800 783 2367.