The Bank of England Monetary Policy Committee sets base interest rates every month. The MPC decided on an interest rate to ensure that the inflation target is met. Basing their decision on extensive briefings about the economy, and using a model of the economy, the MPC can decide to increase, decrease or retain the same level of interest rates.
Changes in interest rates affect your mortgage repayments, either instantly or in the future if you are in a fixed-rate or discount deal.
This interest rate guide explains how interest rates work, how your loan will be affected when interest rates go up and down, and what you should do about it.
The base rate was held on September 10, 2009 at 0.5%, the lowest rate in UK history.
If interest rates increase, it is due to Bank of England concerns over inflation and the level of debt. Increased interest rates make saving more attractive and borrowing less attractive. Borrowers will face higher repayment levels, and for many people who have mortgage loans this can make their financial burden harder to bear.
For information on how interest rates affect you when they increase, click here.
Reduced interest rates make borrowing more attractive, and stimulate the population to spend more. Declining rates also reduce the income that comes from savings, and the interest payments that are due on mortgage loans. When interest rates fall, the prices of assets such as houses tend to increase.
Existing homeowners may then be able to increase their mortgage by moving up the property ladder, take out a remortgage or secured loan more comfortably, and have more disposable income due to lower repayments. In a climate of falling interest rates, a mortgage tied to the base rate (such as a tracker mortgage) can make more financial sense than a fixed-rate mortgage.
For information on how interest rates affect you when they decrease, click here.
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