What are interest rates and how does this affect you?
Setting interest rates is one of the many ways the Bank of England can try to control the UK economy.
If interest rates go up, it can make borrowing more expensive - especially for homeowners with mortgages - but it can also give savers a better return.
How does the Bank of England set interest rates?
- The Bank of England uses changes in the interest rate at which it will lend money to other banks for a single day.
- This is known simply as Bank Rate.
- Bank Rate is also known as the Bank of England base rate.
- By manipulating this rate, the Bank hopes to keep prices stable and keep the economy growing at a steady pace.
How do interest rates affect me?
- People who have paid for their home with a mortgage are the most affected by interest rate changes.
- Some mortgages - called "trackers" - are directly linked to Bank Rate. If the rate goes up, the mortgage will go up too, and if it falls they usually fall too.
- The interest rates of other types of mortgages will also be influenced by Bank Rate, but less directly.
- It also affects the interest rates people earn on their savings. The recent period of low Bank Rates has seen savings rates fall sharply too.
- Bank Rate will also affect the interest rates charged on other forms of credit, such as credit card loans, bank loans, and car loans. So even if you don't have savings or a mortgage, changes in interest rates could still have an impact on your finances.
