A quick guide from Acenden to the base rate and its impact on mortgages

When applying for mortgages, applicants offer hear about interest being determined by the ‘base rate’, but few understand what this means, or how it will affect their mortgage, should they be approved. In this article, Acenden mortgage experts offer a brief explanation as to what this rate is.

The MPC (the Bank of England’s Monetary Policy Committee), made up of the BAE governor and eight economists, has been responsible for setting the base rate for the last fifteen years. They meet monthly and decide whether to freeze, cut or raise rates. The main goal of the MPC, Acenden says, is to ensure that inflation remains close to its target of two percent. Its secondary aim is to support the economic objectives of the government, in regards to reducing unemployment and maintaining growth.

Generally speaking, if inflation is found to be over its target, then the MPC will most likely raise interest rates, whilst if it’s below, it will consider cutting these rates. However, according to Acenden (http://www.acenden.net), there are a number of other factors, such as unemployment levels and the growth of the economy, which will be taken into consideration. If the economy is overheating, rates may be increased; conversely if it is weak the Bank will cut interest rates, even if inflation is higher than the target of two percent.

So how are interest rates on mortgages affected by this base rate? Well, if a person has a tracker mortgage, for instance, their interest rate could be directly linked to changes in this base rate. However there are other types of mortgages, Acenden experts say, whose rates are only mildly impacted by a rise or reduction in the base rate.

This base rate is essentially just an overnight rate of interest which the banks would pay if they borrowed from the Bank of England. But the rate at which a bank will lend to its customers, in regards to mortgages, will not only be affected by this, but also several other factors, including the rates they are paying on savings accounts, and the interest rates which the banks are charging each other. Acenden also point out that if the base rate starts to rise, this doesn’t automatically mean that new interest rates on mortgages will increase. Only those with a tracker mortgage would see their monthly repayment amount rise immediately.