The Bank of England has announced again this month that the base rate will remain unchanged at 0.5%. But why is this so significant for the general public?

If you a home owner or a saver the Bank of England’s base rate will have a large impact of your financial position.  The Bank of England is the central bank for the UK and is responsible for the country’s monetary stability and the value of the pound. The way in which the bank does this is by raising or lowering the base interest rate as a responsible to inflation or deflation.

Each month the Bank of England’s Monetary Policy Committee (MPC) review the base rate and their decision affects all lending and saving.

Currently the Bank of England have kept the base rate at a low of 0.50% to try and combat the financial instability caused by the nation’s high borrowing percentages but with inflation (the increase in cost of living) this year being at 4% many are calling for a rise in the base rate to combat the increasing rate of inflation.

The main advantage for the general public of the low base rate is for those with tracker mortgages. A tracker or variable mortgage is offered by lenders at a set percentage above the base rate. So if your rate is set at 2.49% above the base rate and the base rate is 0.5% you are charged 2.99% interest, if the base rate increases to 1.00% then you will then be charged 3.49% interest.  These type of mortgages are fantastic when the base rate is low as your monthly repayments are low but they offer no financial security in your monthly payments as they increase or decrease based on the base rate. Not all providers use the Bank of England base rate to set their lending so it is always important to understand what will affect the rate of any tracker or variable mortgage.

The major disadvantage is for those who have savings. Interest earned on savings held with any of the major banks is nominal, even with the ISA advantages. Another distinct disadvantage is that whilst the base rate is low the growth rate of the economy is low and this means that assets such as property will not be appreciating in value.  In fact in some cases many people are left with negative equity in their property, where they owe more on the property than the property’s market value.