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Bank of England Base Rate, what does a rise actually mean?

We have been living, for the last 10 plus years, with very low interest rates.  Speak to anyone over the age of 50 and they will tell you of mortgage rates of 15% and more, so compare that to mortgage rates currently around the 2% mark, that shows you how low the current rates have been.

On 2nd August 2018, the Bank of England (the central bank who sets the interest rates) moved the central rate up from 0.5% to 0.75%, an increase of 0.25%.  It doesn't sound a lot, but what does it actually mean?

What do the Bank of England do?

The Bank of England's main priority is to keep the cost of living and the fact that it is usually rising (this is known as inflation) under control.  To do this, the Bank will use its key interest rate, known as the Bank rate or base rate, as the focal point for how much banks and building societies pay savers and charge borrowers in interest.  Typically if the central rate goes up, it is good for savers but worse news for borrowers - however, in reality, it isn't as simple as that.

How does it work?

People who are relying on their savings to live or build pots of money should be better off as they can potentially get a better interest rate return as the interest rates have gone up.  The last rate rise, from 0.25% to 0.5% happened in November 2017 and the interest rates offered on some savings accounts did rise slightly. 

Those with variable rate mortgages will probably see an increase in their mortgage payment, particularly those with Base Rate Tracker Mortgages, where your mortgage rate is set a % above or below the Central rate.  To give you an idea, a £150,000 variable rate mortgage which has now risen 0.25% will see an increase in monthly payment of about £19.00.  If you are on a fixed rate mortgage, do not worry, you will continue to pay your interest rate until the end of your fixed rate term.

So the interest rate will go up immediately for my savings and borrowing?

Now, if you are rubbing your hands together thinking your savings are going to increase because of the rate rise, it isn't as simple as that.  Banks and Building Societies do not have to increase their savings rates, or pass the full 0.25% increase onto their savers.  During the last rate rise, in November 2017, nearly 50% of all savings accounts did not increase their savings interest rate and expect this to happen this time aswell.

So, in short, if you have a mortgage should you be worried about the interest rate rise? We do not believe so, the rise is minimal but it should prompt you to look at your monthly outgoings and ensure everything is still affordable.  If you are a saver, should you be excited, unfortunately, again not really.  The rate rise is small, so will not alter your life, but an increase is better than a decrease (assuming your bank passes the increase on).

If you do have concerns about how this may impact you, speak to your bank, building society or your financial adviser.

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