If interest rates rise, borrowing could become more expensive for you. Whether you are looking to get a mortgage to buy a house, or a new car on credit, it’s crucial to think about what higher costs mean for you.
What is Bank Rate?
Bank rate is the rate charged by the central bank for lending funds to commercial banks
‘Bank Rate’ is the key interest rate in the UK. It is our job to set this interest rate.
It is important because it influences many other interest rates in the economy. That includes the lending and savings rates offered by high street banks and building societies.
Bank Rate is currently 1.25%.
Bank rates influence lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks. In order to curb liquidity, the central bank can resort to raising the bank rate and vice versa
Bank rates are called different names in different countries. For example, in the United States, the central bank is the Federal Reserve and its bank rate is called the discount rate. For countries that use the euro and borrow from the European Central Bank, the bank rate is called the marginal lending facility rate.
- Alternate names: discount rate, marginal lending facility rate
Why are there so many different interest rates?
The number of different interest rates available when you borrow or save can be confusing.
The interest rates high street banks set depend on more than just Bank Rate.
For loans, other factors are considered, including the risk of the loan not being paid back.
The greater the lender thinks that risk is, the higher the rate the bank will charge. It can also depend on how long you want to take out a loan or mortgage for.
You can use our interactive chart to see how interest rates of different financial products have changed over time. Choose a product from the drop down menu in the ‘enter the series’ box.
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Why do interest rates matter to me?
Imagine you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 2.5%, the monthly repayment will be £583.
But if the interest rate is 1% higher, the monthly repayment will be higher, at £651.
Of course, interest rates can go down as well as up. If the mortgage interest rate was 1% lower, the monthly repayment would be around £520.
It’s very important that you understand how a change in interest rates could impact your ability to pay.
It’s key to understand how a change in interest rates could impact your money. You can use a mortgage calculatorOpens in a new window to work out how your monthly payments might be affected.
An interest rate tells you how high the cost of borrowing is, or high the rewards are for saving.
So, if you’re a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back, for a loan of a given size.
If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit.
Even a small change in interest rates can have a big impact. It’s important to keep an eye on whether they rise, fall or stay the same.