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The base rate and remortgaging

The Bank of England's base rate (which is decided by the Bank's Monetary Policy Committee) is the rate at which the Bank lends to banks/financial institutions.


The rate, which is set based on economic conditions, will have a direct impact on the interest rates charged by banks when they lend to their mortgage customers. If the Bank's base rate increases or decreases, the interest rates charged by high street banks tend to follow suit (depending on what type of mortgage we're talking about).


At the time of writing this article, the Bank of England's base rate stood at 0.5% - the lowest level ever recorded.


How does the base rate affect consumers?


A low base rate can be good and bad for consumers.


Well, while a low base rate may be good for someone's monthly mortgage payments (particularly someone with a tracker-rate mortgage); it wouldn't be good for their savings - as they probably won't accumulate much interest.


The base rate will also affect homeowners who are planning to remortgage.

So, if your current mortgage deal is drawing to a close, or you think you could be better off if you switched to an alternative deal, how might the base rate affect you?


The answer to this really depends on the type of mortgage you have/are going to switch to when you remortgage.

If, for example, you're on a fixed-rate deal now, the rate of interest you're charged will stay the same for the agreed term (two years, for example, or five), whatever happens to the base rate. Once this term comes to an end, it's likely that you'll be placed on your lender's standard-variable rate (SVR) - which will usually change to suit the base rate.


SVRs, as they are known, aren't directly 'tied' to the base rate (they are 'loosely' based on it), and your lender is allowed to choose their own rate… so the extent to which this will affect your payments will depend on the rate you are charged. (Note that a lot of people will move to a new deal at the end of their current mortgage term, rather than moving to the lender's SVR deal.)


The mortgages most affected by the base rate are tracker mortgages - as they are usually set at a certain amount above the Bank's base rate (and they 'track' the base rate directly, rather than indirectly, as standard-variable rate deals do). So, if the base rate goes up or down, your mortgage payments will too.


So, to conclude, the extent to which your payments will change depends on the deal you've got/are going to remortgage to. That's why it's so important to consider all your options before committing to anything. After all, if you can't keep up with your mortgage payments, your home could end up being repossessed.