The Bank of England Monetary Policy Committee (MPC) 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. Read our mortgage interest rates guide below to understand how they work.
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.
When interest rates increase
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.
When interest rates decrease
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.
Interest Rate Decisions
Understanding interest rate decisions is an important part of the mortgage process. For more information about what interest rates are and how interest rates affect mortgage repayments, please see the relevant Mortgages.co.uk section.
When do interest rates change?
The Bank of England Monetary Policy Committee makes a decision on interest rates on the first Thursday of every month.
At this point, the MPC will vote to decide whether to increase, maintain or decrease interest rates. Decisions are announced immediately following 12 noon, both on the Bank of England website and throughout the news.
The Bank of England
The Bank of England is the institution that sets interest rates in an attempt to control inflation and deflation and to maintain a stable financial system.
One of the central purposes of the BoE is to sustain stable prices and confidence in the currency.
Decisions on interest rates made by the independent Monetary Policy Committee are supposed to follow Government inflation targets and should in theory lead to stable prices; however the current economic downturn has resulted in interest rates decreasing to historically low levels in an attempt to maintain a certain level of consumer spending and in turn prop up the country’s financial system.
Interest rates are revised each month, with the decision to increase, maintain or decrease made on the first Thursday.
The Monetary Policy Committee change interest rates depending on levels of inflation and deflation. These are affected by a number of things including consumer demand, costs of labour and materials.
The UK as a global enterprise needs to uphold a constant rate of inflation in order to sustain competitive prices for the products which are sold worldwide, therefore the role of the Bank of England as a regulator for interest rates is an essential tool for maintaining economic success and stability within the country, and for the country in a global context.
Currently interest rates are at an all time low as a result partially of inflation from recent years but more significantly as a result of banks over stretching themselves and not saving sufficient liquidity levels.
This essentially means that UK banks, similar to those throughout the rest of the world, have been lending out as much money as possible particularly in the real estate sector, in an attempt to make giant profits through interest. However, financial systems hadn’t accounted for borrowers who were unable to meet repayments, this in addition to the damaged housing markets has left major margins between outstanding debts and money coming in.
By reducing interest rates the government is hoping to reduce monthly mortgage repayments as well as decreasing mortgage and refinance rates for borrowers.
This will supposedly free up excess funds to increase consumer expenditure in the long run and therefore rebuild the economic system.
How interest rates affect repayments?
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.
What should you do when interest rates go up?
- Speak to a Mortgages.co.uk mortgage advisor - This service is free, and no-obligation
- Make sure that you have the most competitive deal. If repayments are going up, every penny could become more important.
- Don’t let your deal expire. When you come to the end of a special rate period, you will revert to normal variable rate. In a climate of rising interest rates, this can be seriously high and lead to big repayments. Be aware of any early repayment penalties or penalties for remortgaging to another lender, and arrange a remortgage in advance.
How Swap Rates affect Mortgage Repayments
It is not just interest rates set by the Bank of England that affect mortgage repayments. Swap rates and LIBOR rates also affect mortgage borrowers.
What are Swap Rates?
Swap rates are the borrowing rates between financial institutions. Swap rates form the basis of the LIBOR rate.
How do swap rates affect mortgage repayments?
If swap rates are higher than usual, the cost of mortgage repayments goes up. For instance, at the current time (although this is subject to change) swap rates are higher than usual, meaning the price at which lenders buy their funds within the money market is also higher. In response, banks, building societies and mortgage lenders have to increase the cost of repayments.
Why is the cost of fixed-rate mortgages adjusted particularly quickly?
The cost of fixed-rate mortgages is particularly sensitive for lenders. If they fix a mortgage loan at a certain level of repayment, and swap rates remain high or climb throughout the period, they face a greater chance of losing money.
Do lenders always increase repayments above the level of swap rates?
Not always. Many borrowers will attempt to ride out high in swap rates and not adjust the cost of their loans. In an increasingly competitive mortgage market, it is in the best interest of mortgage lenders to keep their products as cheap as possible. Lenders make up their money by cross-selling, or from borrowers who let their fixed-rate deals expire and revert to standard variable rate. .
Does this mean I should fix my mortgage repayments now?
Financial services experts are currently advising consumers hoping to fix their repayments to strike a deal as soon as possible. However, the market is subject to change, and this course of action may swiftly become less appropriate.
To keep up to date with changes to the interest rate, the LIBOR rate and swap rates, sign up for our monthly newsletter and mortgage alert mailshots on the right hand side of this page.
How does the LIBOR rate affect mortgage repayments?
Libor Mortgage Guide Many borrowers are unaware that the cost of their mortgage loans isn’t only anchored to bank of England base interest rate. Although interest rates have a major influence over the cost of mortgages, the level at which borrowers must repay their loans is also influenced by the LIBOR rate, and by swap rates.
What is the LIBOR?
The LIBOR rate officially stands for the London Interbank Offered Rate. This is the rate at which banks borrow money from each other, within the interbank market. The BBA LIBOR rate is compiled daily by the BBA and released by Reuters – this has a marked influence on short-term rates.
Who decides on the LIBOR rate?
The BBA (British Bankers Association), a board of advisers, and a reference panel decide the LIBOR. The team employ ‘spot fixing’ to make sure the rate is accurate and transparent. The LIBOR is a short-term, very sensitive rate. There is no way of forecasting the rate beyond a year.
How does the LIBOR rate influence the cost of mortgages?
If the LIBOR rate is consistently high, mortgage lenders will quickly adjust the cost of their mortgages to reflect this.
Why is the LIBOR more relevant than usual in the current mortgage climate?
Currently, although this is subject to change at any time, the LIBOR rate is substantially higher than the base rate. Although many mortgage borrowers are unaware of this, lenders monitor it constantly.
When the LIBOR is up, lenders face a shortage of money to fund competitive deals, and as a consequence up their rates. During periods when the LIBOR substantially exceeds base rate, it becomes more relevant as an indicator of mortgage cost.
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