The Bank of England base rate influences all loan and mortgage interest rates in the UK. When the Bank of England decreases the base rate, interest rates usually decrease as well. This means borrowing gets cheaper - but returns on savings will go down as well.
The current Bank of England base rate is 0.1%.
The base rate dropped to 0.1% following the outbreak of the coronavirus pandemic in March 2020. The aim of the base rate reduction was to help control the economic impact of coronavirus on the UK economy. In the latest Bank of England base rate meeting in May 2021, the base rate remained unchanged at 0.1%.
The base rate, sometimes known as the bank rate or base interest rate, is the most important interest rate in the UK.
Set by the Bank of England (BoE), the base rate influences the interest rates offered by other banks and building societies. If the base rate goes up, then most mortgage, loan, and savings rates will go up by a similar amount - and vice versa if it goes down.
By changing the UK's base rate, Bank of England can influence how Brits use their money - whether we're more inclined to spend money or save it.
Generally, if the BoE reduces the base rate, it becomes cheaper to get a mortgage or loan, and you're more likely to buy a house or car.
If the base rate goes up, mortgage repayments and loan repayments become more expensive - but on the positive side, you'll also earn more interest on your savings.
If you have a fixed rate mortgage, changes to the base rate won't impact your monthly repayments until the fixed rate period ends. When your initial term ends, though, you should consider remortgaging to another fixed rate mortgage deal.
The current base rate is 0.1% marking the lowest it's ever been in UK history.
Previously at 0.75%, the Monetary Policy Committee (MPC) met on 10 March 2020 and cut the base rate down to 0.25%. Nine days later, in an unscheduled meeting on 19 March 2020, the BoE decided to make a further cut to the base rate to its current rate of 0.1%, to counter the economic impact of the COVID-19 pandemic.
Even at its highest point in 2020, the base rate of 0.75% was still considered very low, keeping mortgage interest rates in the UK down. Since the base rate was cut in March 2020, the average mortgage interest rate for a two-year fixed mortgage has fallen even lower at around 1.41%. Before the financial crisis in 2008, the cheapest mortgage rates were more like 5%.
On a mortgage of £150,000, that's the difference between a monthly repayment of £593 vs £877 - or almost £3,500 per year.
On the flip side, the low BoE base rate means the current interest rates in the UK for savings are also very low.
It's currently very hard to find a conventional cash ISA, easy access, or fixed rate savings account that will give you more than 1% interest. To get an interest rate to match the current rate of inflation, you need to lock your savings away and not touch them for at least five years.
When the base rate changes, interest rates change and the amount of money that people spend changes overall. The Bank of England uses the base rate to influence how much people spend and as a consequence, keep inflation rates in line with the Government target of 2%.
The BoE can change the base rate at Monetary Policy Committee (MPC) meetings, which generally happen eight times a year.
It's difficult to predict exactly when the Bank of England will change the current interest rate, though they do try to control expectations by issuing guidance on whether the base rate will go up or down over the next year.
The BoE uses the base rate to keep inflation at around 2%, so if Brits start spending too much or too little, an interest rate change is usually around the corner.
Because the financial sector and the rest of the country is so heavily impacted by base rate changes, it's rare for a base rate change to be a surprise, but it can happen as an emergency measure to tackle unexpected economic conditions.
When the BoE base rate increases, it becomes more expensive to borrow money. This means that interest rates on loans and mortgages are higher, costing you more each month to borrow.
Conversely, when the bank base rate decreases it becomes cheaper to borrow, which can result in cheaper mortgage rates on offer and more money available from lenders for consumer borrowers.
Although it has not yet happened, The Bank of England did highlight that the base rate could fall below 0.1% and possibly become a negative interest rate. The result of a negative base rate would be that no interest would be paid on borrowing money.
The BoE has been setting the base rate in the UK since way back in 1694.
Following the global financial crisis in 2008, the BoE gradually cut the base rate from 5.5% down to just 0.25% in August 2016 - historically the lowest interest rate the UK had ever seen until that point in time.
Before the Covid-19 pandemic, the Bank of England base rate had been slowly climbing, to 0.5% in November 2017 and then 0.75% in August 2018.
Before the financial crisis of 2008, the history of the UK interest rates was a lot more fluid. In 1984 the base rate changed 14 times, starting at 8.8%, rising to 12%, and then falling back to 9.5%.
Historically mortgage rates have usually followed the base rate, with the average mortgage rate generally around 2% higher than the bank base rate.
This graph shows how the base rate has risen or fallen over the past 12 years:*
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.