The base rate is the rate set by the Bank of England and charged to banks which borrow from it. It then feeds through into the interest rates charged by lenders and paid to those with savings. Currently, the base rate is 0.1% and inflation is sitting at around 3%. This means that a rise to the base rate has to be a possibility everyone should consider.
Understanding the base rate and inflation
The Monetary Policy Committee of the Bank of England is tasked with keeping inflation at 2%. They get a 1% margin of error either way. If inflation drops too far below target, the BoE can choose between lowering interest rates or applying quantitative easing. If, however, inflation goes too far above target, then the BoE’s only option is to raise interest rates (or do nothing).
Currently, inflation is already above target and is forecast to increase further. This means that the BoE has to choose between raising interest rates and doing nothing. In reality, the BoE might opt to do a combination of both. In other words, they might increase the base rate slightly but hold off any major raises.
For example, they could return the base rate to the pre-pandemic level of 0.5%. This might take the edge off inflation without hurting borrowers too hard. Of course, such a small increase wouldn’t be thrilling news for savers. That said, right now, savers would probably consider themselves fortunate just to be in the position to save.
The base rate and the mortgage market
What an increase in the base rate would mean for the mortgage market would largely depend on your position in it. If you already have a mortgage then the first key point is whether it is variable rate or fixed rate. The second key point is when you are eligible to remortgage.
If you’re on a fixed rate and have an extended period before remortgaging then you can essentially ignore any increase to the base rate, at least as far as your mortgage is concerned. It could still have implications for your family finances in general.
If you’re on a fixed rate and coming to the end of your initial fixed-rate term then you should definitely be thinking about remortgaging. Similarly, if you’re on a variable rate and coming to the end of an introductory deal/lock-in period, then remortgaging should also be high on your agenda. This holds true at any time but particularly now that an interest-rate rise could be on the cards.
If you’re on a variable rate and not able to remortgage, then you need to start thinking about how you will meet your repayments if interest rates go up. In addition to looking at your overall budget, you might want to check if you need to increase your insurance provision. For example, if you have PPI, income-protection insurance and/or critical illness cover, are you still happy with the level of protection you have?
The base rate and your finances
If you have any debt, including non-mortgage debt or savings, then changes to the base rate definitely have the potential to impact your finances. How long it takes for changes to be felt and how much of an impact they have will depend on the nature of your debt or savings.
For example, products sold on a fixed rate will remain on that rate at least until the agreed term ends. Products coming to market, however, will be priced to reflect the changes. Products sold on a variable rate will have that rate updated to reflect the changes. How quickly these updates will be applied will depend on the company behind them and the nature of the product.
In short, therefore, if interest rates start to go up, you can expect non-mortgage debt to get more expensive. You can also expect to get more interest on your savings. You should therefore consider what this would mean for your overall finances.