The Bank of England base rate has a long, distinguished history. Since the late 1600’s, the base rate has been the foundation for lending rates between banks as they loan money to each other through overnight lending. Because of its function, the base rate has great influence over the UK economy. Not only does it shape what happens and how it happens financially within the economy, it is the main factor able to control inflation. The percentage level where the base rate resides at any given time has been voted on and set by a committee within the Bank of England. This committee is known as the Monetary Policy Committee, or MPC.
The base rate is the starting point of any lender when calculating the interest rate for an original mortgage loan or a remortgage. The lender uses the base rate to ultimately define how much the interest rate is on any mortgage loan which a borrower takes out. From the starting point of the base rate, other points, or other percentages, are added to ultimately formulate the interest rate associated with the mortgage loan product. There are other percentages added to the base rate to ensure the lender will make money by offering the loan. In other words, this is the price for doing business with that particular lender. The amount of risk a lender is taking on the loan is a major factor in how much the interest rate ends up being. There are also administrative costs figured in with the points added to the base rate. It would be impossible for a lender to maintain its viability as a business without adding to the base rate. The lender would just be losing money each month without adding points to the base rate for each loan.
Through the years the base rate has been set at a level with a wide range. It has been set at a low of 0.5%, and a high of 17%. At very low rates, a significant amount of money can be saved over the term of a loan. The opposite is true as well. Many homeowners decide to remortgage when rates are low and many first timers set out to purchase their first home. A fixed rate loan is the most popular type of loan when rates are low. A fixed rate product carries with it the guarantee that the monthly mortgage payment will not go up for the term of the loan. A large number of homeowners who own a variable rate loan often switch to a fixed rate loan when rates are low.
There are several economic indicating numbers which are trackable on a daily basis. None are as important as the Bank of England base rate. The base rate has the most influence over the economy as a whole, especially when inflation starts to rise. The Central Bank uses the base rate as a tool to control the inflation level. The ongoing target rate for inflation in the UK is 2%.
