Bank of England Base Rate
This is the rate set each month by the Bank of England.
How is the rate used by banks and building societies?
Banks and building societies use this base rate to set their own interest rates.
They use it as a benchmark to help them calculate the interest to apply to savings products. They also use it to determine how much interest to charge on loans, including personal loans and mortgages.
How often does the base rate change?
It is reviewed every month, but this does not mean the rate changes every month. It may stay unchanged for several months or perhaps even a year or more. The prevailing conditions help determine whether the rate should change, and if it should, whether that change should be upward or downward.
Banks and building societies are not obliged to pass on savings gleaned from a fall in the base rate. However, in practice they usually do pass on at least part of the savings. This helps them to remain competitive in the products they offer to those looking to borrow money, perhaps for a mortgage, for example.
Similarly, they do not need to increase interest rates on savings if the base rate goes up. However, once again it does benefit them to increase the rate if doing so might lead to more people saving with them.
Fixed rate mortgages help protect against potential future rises in the base rate
The Bank of England often gives clues as to whether it is likely to raise the base rate in the coming months. You cannot fully rely on this, but many people like to opt for a fixed rate mortgage (slightly higher than a variable rate one) as it protects against future rises that may occur. Fixing for two, three, five, or even 10 years provides protection against such rises.