The Bank of England is raising interest rates for the first time in 10 years.
The Bank of England has raised interest rates for the first time in 10 years, but what does this mean for you?
What is an interest rate?
An interest rate is a price paid by a borrower to a lender, calculated as a percentage of the amount borrowed. It’s used to reflect the cost of borrowing money and will affect how much you pay back on your loan.
Why are interest rates being raised?
Raising interest rates means that banks and building societies will charge customers more to borrow money. This will mean that they can make more profit from their lending activities, which they can then use to invest in businesses and help stimulate economic growth.
Why do banks raise their rates before the Bank of England raises its rates?
Banks tend to be quicker than central banks at changing their lending rates. They may also feel less pressure from the market because they don’t have one single benchmark rate like central banks do. The Bank of England’s base rate is known as ‘Bank Rate’, while most lenders use Libor as their benchmark.
When a bank changes its base rate, it affects all other variable mortgage and savings products offered by that bank or building society. The size of these changes depends on how closely linked each product is to Libor.
How does an increase in interest affect my mortgage repayments?
Variable mortgages are linked directly to Bank Rate so any change in this directly affects your monthly repayments. This means that if you have a variable mortgage and your lender decides not to pass on any rise from the Bank of England then you won’t see any change in your monthly payments.
Fixed mortgages are also affected by changes in Bank Rate but only after an initial period known as ‘grace’. Grace periods vary between lenders but usually last between one and two years before fixed mortgages begin moving up or down with changes in Bank Rate.
