An Overview of the August 2018 Base Rate Change
Background to the August Base Rate Rise
The base rate is the Bank of England’s official borrowing rate –that is, what it charges other banks and lenders when they borrow money. It influences what borrowers pay and savers earn. The increase announced in August followed a rise last November from 0.25% to 0.5%.The August rise of 0.25%, from 0.5% to 0.75%, was only the second (source: Google, theguardian.com) interest rise in the last decade following the crash of 2008. At the time of the announcement, inflation had also fallen from its highest level in five years, and unemployment remained at its lowest level since the mid-1970s.
Citing concern that this consistently low unemployment rate meant re-igniting wage pressure, The Bank of England raised interest rates whilst warning that there would be further increases in borrowing costs if the economy continued to recover; but did also state they would reverse the quarter-point increase in the event of a disorderly Brexit.
The Bank’s decision came despite fears continuing to mount over Brexit, with Theresa May facing constant and continual parliamentary divisions over her plan. This Brexit uncertainty led to business groups criticising the decision to raise rates by the Bank of England, given the mounting likelihood of a no-deal Brexit, that higher borrowing costs would deter firms from investing in Britain.
The base rate rise was partially influenced by some better news for the economy during the summer, with the unprecedented heatwave and the royal wedding combining to create an encouraging rise in consumer spending. It’s not all been easy going in 2018 for the economy though. Factory output has slowed in response to a global economic growth slowdown amidst Donald Trump placing import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers remain unlikely unless linked to the mandated national minimum wage rises.
How did the base rate rise affect me as a mortgage payer?
If you were on a standard variable rate mortgage, your rate likely went up, and if you were on a ‘tracker’ mortgage – which as the name suggests quite literally tracks the base rate – it definitely did. So if you’re a mortgage holder and haven’t yet checked whether you can get a better deal by re-mortgaging, you should do so immediately as you could save money.
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Nearly 70% of homebuyers, however, have fixed-rate mortgages (source: moneysupermarket.com) so some were unaffected. If you were one of those on a fixed rate mortgage, your rate won’t have changed for now, though if your deal is coming to an end you may end up paying more once your introductory deal finishes. It is still worth reviewing before your fixed rate ends, as some can still save by switching.
If you were on a standard variable rate (SVR) or ‘discounted’ mortgage, your monthly payments most likely rose by the full 0.25%, as most mortgage providers follow the base rate. This would have cost you £180+/yr more per £100,000 of mortgage. (source: moneysavingexpert.com) – do you have the article for this I just need to check it – I’m assuming they’re taking into account that the capital of £100k would reduce over a year and that’s why the figure is not £250 per year – but just want to check it) As each individual lender sets its own rates and timescales of implementation, it’s certain that some of us were worse off than others with this change. About a quarter of total mortgages in the UK- roughly 1.8 million – are on an SVR.(source: moneysavingexpert.com)
If you were on a tracker mortgage your rate will have definitely risen by the same amount as the base rate – 0.25%. Roughly 1.3 million mortgages are trackers. (source: moneysavingexpert.com)
It’s worth noting that if you’re on your lender’s standard variable rate mortgage you could be overpaying. The average SVR is 4.24%, yet one of the top two-year fixed mortgages available right now is just 1.35%. The difference in interest payments would be thousands of pounds per year on a typical £150,000 repayment mortgage (source: moneysavingexpert.com). It could be beneficial to investigate this further and potentially reduce your monthly outgoings.
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What were the other effects of the rise?
For savers, the rate rise was generally good news. However, some institutions may have increased their offers more than others, while others may not have changed their savers rates at all. Make sure you’re making the most out of your money, by researching and comparing different savings providers and their product.
Comparing is your best way to ensure you are getting the best possible deal. A Bank rate rise does not guarantee the equivalent increase in interest paid to savers. Half did not move after the rate rise in November 2017. No easy access savings account at a major High Street bank currently as of October 2018 pays interest of more than 0.5% but if you’re earning less than that you can almost certainly move to a better deal.
Here’s what to do now if you’re a mortgage holder:
Dig out the details of your current mortgage. Find the rate, if it’s fixed or variable, when the intro deal ends, what the term is, if there are early exit penalties, and then enquire here to find out what savings you could be making.