An interest rate is the cost of borrowing money or the return on investment for lending to others. It plays a crucial role in the financial system, informing the cost or reward of products such as loans, savings accounts, mortgages, and investments.

Here’s a breakdown of how interest rates work in personal finance: 

1. Economic indicators: 

• The Bank of England’s Monetary Policy Committee (MPC) sets the base interest rate for the UK economy. Changes in this rate have a ripple effect on other interest rates. For example, when the base rate is lowered, banks tend to lower their lending and savings rates, making borrowing cheaper but reducing returns on savings and vice versa. 

2. Borrowing money: 

• Loans: When you borrow money, such as through a personal loan or a credit card, the interest rate is the percentage that the lender charges you on top of the principal amount borrowed. This is the cost of borrowing money, and it’s typically expressed as an annual percentage rate (APR). The APR includes not only the interest but also any additional fees associated with the loan. 
• Mortgages: When you take out a mortgage to buy a home, the interest rate determines how much you’ll pay over the life of the loan deal. Mortgage interest rates can be fixed for a certain amount of time (usually two, three or five years) or variable (changing periodically, usually in relation to the Bank of England’s base rate). 

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3. Saving and investing: 

• Savings accounts: When you deposit money in a savings account, the bank pays you interest on your savings. This interest is typically lower than the interest rates on loans because you’re essentially lending your money to the bank. Savings account interest rates can be variable or fixed. 
• Investments: In the context of investments, interest rates can affect various financial products. For example, bond yields are influenced by prevailing interest rates. When interest rates rise, bond prices tend to fall and yields rise. Additionally, the return on savings and investment products such as Individual Savings Accounts (ISAs) is influenced by interest rates. 

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An interest rate is the cost of borrowing money or the return on investment when you lend money or deposit it in a savings account. It’s usually expressed as an annual percentage of the amount borrowed or invested. 

Types of interest rate:  

1. Base Rate: The Bank of England sets a “base rate,” which is the interest rate at which commercial banks borrow from the Bank of England. This rate influences the interest rates that banks charge their customers for loans and mortgages, as well as the rates they offer on savings accounts. 

2. Fixed Interest Rate: This is an interest rate that remains constant over a specific period. For example, if you have a mortgage with a fixed interest rate, your monthly payments will stay the same for the duration of the fixed term, regardless of changes in the base rate. 

3. Variable Interest Rate: A variable interest rate can change over time, often in line with the Bank of England’s base rate. For instance, if you have a loan or mortgage with a variable rate, your payments might increase or decrease depending on changes in the base rate. 

4. APR (Annual Percentage Rate): This is a broader measure of the cost of borrowing, including not just the interest rate but also any additional fees or charges. It’s a useful figure for comparing different financial products. 

Interest rates have important implications for households, businesses and the wider economy. This is why the Bank of England tries to manage its base rate accordingly to produce the best outcomes for all considerations.

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We have entered a new era in mortgage lending. The era of rock bottom rates is over. The question on everyone’s lips now is where will the market settle are what is likely to be the new normal for mortgage rates?

For most commentators’ rates are still too high, especially as inflationary pressures ease. So, that begs the question when will see a cut to the Bank of England base rate to help stimulate the stalling UK economy?  Well, we’ve got an interesting Summer ahead of us.

There are many external factors that will impact that decision. A new Government is set to be elected in the UK and will most likely signal their intent with a mini budget soon after the polls close. In the wider world we have an election in France that is already creating an amount of political and economic turmoil and a presidential race in the US which will certainly feed into Swap rates, one of the main funding mechanisms used by many lenders in the mortgage market to ensure they have money to lend to homeowners.

All those factors, and Swap rates in particular, are likely to have a huge bearing on the rates UK mortgage borrowers will pay on their mortgages.

Looking at this picture, and contrary to the prevailing wisdom from earlier in the year, I don’t think we are going to see a Bank of England base rate reduction this summer. Not least because a cut this close to an election is too politically sensitive for an independent and supposedly politically neutral Bank of England. In my view we are almost certainly looking at Autumn for any cut and it will likely follow a mini budget from whoever the new government will be.

If the short-term picture is complicated then perhaps it pays to look back. On occasions like this it can be helpful to look to history to see what we can learn about what our new normal may be.

Thinking back to when I came into the industry in the mid-1990s I was advising on mortgages with a five-year fixed rate of 13.65%. That is a figure that may make younger borrower’s eyes water but back then that was considered a good deal!

I mention that as context and to make the point that it’s interesting so many feel that having a base rate of close to zero ushered in some kind of golden era. Perhaps it was if we consider only mortgage borrowers. However, it’s debatable how good those long-term low rates have been for the wider UK economy and it was certainly bad news for savers.

We also forget the driving factors behind why Bank base rate ended up at 0.5%. It was a response to the small matter of a global financial crisis in 2008 which saw lenders such as Northern Rock go to the wall and many another lenders wobble under the pressure.

Taking all of that into account I think the new normal mortgage borrowers should expect for interest rates in two years’ time is likely to be between 3.5% – 4%. That should help ensure that inflation is kept in check, that the UK economy can grow and lenders and borrowers can maintain sensible lending practices which is crucial for a healthy and stable mortgage market.

As the cost of borrowing increases then eligibility criteria may also become more of an issue. It’s more important than ever that borrowers shop around the market and find lenders that can intelligently assess a borrower’s position.

At West One we pride ourselves at taking a more human approach to the eligibility process and I think, now more than ever, that will prove valuable to our customers as they readjust to the new normal in mortgage pricing.

Steve Mannakee is national account manager at specialist mortgage lender West One.

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In homes across the UK, a quiet revolution has been unfolding for nearly two years. It is one that could redefine how families view their future financial stability.

In September 2022, the Monetary Policy Committee started the process of increasing the Bank of England base rate from 0.25% all the way up to the current peak of 5.25% to combat what had become a rampant inflation rate.

This rapid rise came without much warning and is a stark reminder of the precariousness of our assumed financial certainties. For too long, homeowners have been allowed to settle into the comfort of low interest rates, treating them as the status quo rather than the historical exception they really are.

The reality is that the low Bank of England base rate was never meant to be a permanent fiscal fixture. That low rate was a temporary measure, and part of a necessary response to the 2008 global financial crisis and again to the economic devastation wrought by the COVID-19 pandemic in 2020.

History shows us how certainty is not a luxury we can count on when it comes to our finances. And here we are, facing another unexpected turning point that leaves us all to consider what the new normal may be for mortgage borrowers in the next few years.

All indications are that interest rates are set to stay a lot higher than we have become accustomed to and that may signal a potentially painful adjustment period for many. But this new normal isn’t just a statistical adjustment on a central bank’s balance sheet; it’s a reality that could strain household budgets significantly.

The Bank of England is aware of that. In its most recent Financial Stability Report it estimated that mortgage payments would go up by 50% or more for 400,000 UK households by 2026 creating more pressure and uncertainty for those people as a result.

The Bank of England must be transparent about the logic behind its decisions and the likelihood and rationale of rate increases or decreases in the future. It is not enough to react to crises; we must prepare for them.

Even for industry experts, predicting where the base rate will be over the next two to three years is a challenge. While the expectation is they will tick down a little from where they are today the fact is that rates in and around 4% is the least we should expect in the near-term at least.

With that in mind, fixed-rate mortgages, may also be considered the first line of defence for borrowers seeking stability in an unstable economic environment. Many homeowners have purchased properties based on unusually low interest rates, with rates close to one percent being the norm.

But when those families look to refinance and they are finding mortgages prices in and around the 5% mark instead. In that context, locking in rates you can afford now, may be sensible for many.

The fact is that the ‘certainty’ of low interest rates was never a reality. This new normal of mortgage lending in 2024 proves that. It is a new normal that will require adaptability, foresight, and resilience from borrowers and I am certain of one thing. That the people of the UK possess those qualities in abundance.

Roger Morris is a mortgage market expert with over 30 years’ experience in the sector

Headline photo by Tima Miroshnichenko

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Interest rates were at an all-time low for a long time. In fact, homeowners may be forgiven for thinking that the rates we saw over the last decade were the ‘norm’, and that current mortgage rates available are ‘excessively high’.

In the UK, interest rates are a topical subject, with speculation as to what will or won’t happen regularly making headline news.  And if the news reports are to be believed, it’s only a ‘matter of time’ until rates start to fall again.

Unfortunately, this may only be part of the story. For most of 2024, journalists have been predicting a drop in the Bank of England base rate (the rate of borrowing that the Bank of England charges to its customers – other banks and lenders).

But what does this mean for borrowers?  Will this signal an instant change in mortgage payments?

Homeowners aren’t borrowing money from the Bank of England; they’re borrowing from a mortgage lender. And a drop in the base rate does not mean that a lender is obliged to pass on a discount.

In fact, if you already have a fixed rate mortgage, that rate won’t change at all until the end of your incentive period.

And if you are on a variable rate, your monthly payment may not drop either, as sometimes your monthly payment is linked to the lenders standard variable rate – and not the Bank of England base rate.

So, when will rates fall?

Current expectations are for the Bank of England to reduce their interest rate at some point this year.  But we also have a general election to navigate and an emergency budget in the autumn which could have an impact on the timing and magnitude of that change.

And don’t forget about the election in the USA. Although this may not seem relevant, in our global economy, the cost of lending is affected by global events!

The other thing to consider is lenders may have already assumed a reduction in base rate. This means that some of the rates available to you today were made available with that potential reduction already in mind.

And therefore, mortgage rates offered across the market if base rate does fall, may not change as much as first-time buyers would like.

What is the new normal?

It’s hard to say what the new ‘normal’ will be, but many commentators expect the Bank of England base rate to settle near 4%. This would give us average mortgage rates of 4.5% – about 1% lower than today.

But the timing of this reduction is critical and brings many questions. What if it takes two, three or even five years to get there? How will house prices change during that time? Are you prepared to put your life on hold while you wait? Is what you may eventually save in interest rate worth the risk of waiting?  

If you’re looking to make that first step on the property ladder you must consider all these factors.

How can Perenna help?

It’s hard to predict the future, but with a Perenna mortgage you don’t need to. If you can afford your monthly payments today, you get the reassurance of knowing you never have to worry about your payments going up.

We also know the question of ‘how much can I borrow?’ can be a top priority. So, we’ve designed a product to help.

With our mortgages, you can borrow up to six times your income, subject to criteria. This could act as a huge boost for those struggling to get onto the property ladder.

Curious about how much you could borrow? Try our mortgage calculator today.

John Davison is head of product, proposition & distribution at mortgage lender Perenna

You could lose your home if you don’t keep up your mortgage repayments.

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Must know money focuses on the financial news you need to know. Here’s why inflation falling unexpectedly it matters.

Inflation has surprised with a small drop, slowing to 6.7% on the consumer price index (CPI) measure.

The fall was largely as a result of what the Office for National Statistics (ONS) calls “erratic” cost of overnight accommodation and air fares which both saw falls in August.

Food prices are also rising more slowly than 12 months ago.

The inflation figure has surprised everyone because rising petrol and diesel prices were predicted to be enough to send the index up.

But this wasn’t the case in the end as fuel price increases didn’t outweigh other falls.  

Why does inflation matter?

Inflation tracks the speed at which prices of everyday products and services rise and give us a good indicator of what is happening in the economy.

Lower inflation doesn’t mean prices are falling. They are still rising, just a little more slowly than before.

This is also measured in pure averages – the individual costs of things you muy and how those prices change vary enormously by your own experience.

Broadly, when inflation is too high, everyone has too much money chasing too few goods and services. This can “overheat” the economy and cause a recession.

Experts are now worried that wage growth, which is outpacing inflation for the first time in many years, will help to embed fast-rising prices for longer.

This is all well and good, you say, but I’ve got a pay rise and it is a relief to have more money. And that is true.

But inflation has already damaged the economy in the past two years and made life more expensive for everyone beofre pay rises even began to catch up.

Economists are (often rightly) accused of not thinking about how real people react to such events, but they will tell you that gentle rising inflation and gently rising wages are much less problematic for the economy, and much more sustainable.

Inflation and wages ultimately dictate what level the Bank of England sets its base rate of interest at. The higher that rate, the more expensive financial products such as mortgages and loans will be for families.

The next time that happens is tomorrow when the bank could well raise rates to 5.5%.

Photo by Martin Péchy.

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With interest rates rising, now is a good time to hunt for a good deal on savings.  

Interest rates have been on the rise for many months now, but for you, our Mouthy savers, this is good news! With the Bank of England hiking interest rates, you can take advantage of rising savings rates today.  

Here’s your one-stop to know the best savings rates in the UK. Our savings and interest best buy tracker highlights the top products and providers in the market for the type of account you need and is completely impartial.  

So, if you’re looking to open or switch savings accounts, make sure you run a comparison on Mouthy Money to see what’s best for you right now. 

Source: Moneyfactscompare.co.uk, Wednesday 23 August 2023

Net Interest Margins  

The Bank of England has substantially hiked its base rate in the past 17 months. 

Borrowers will have noticed that the largest UK banks have been very quick to pass on the higher interest rates onto customers. 

However, it is a different story when it comes to savers. Savers are barely benefitting as big banks have failed to pass on those sizeable interest rate hikes to their customers in full.  

Here at Mouthy Money we’re keeping a check on the rates across the big UK banks.   

Here’s how the profit banks are earning on the difference between what they charge borrowers and pay savers stacks up: 

Source: High Street banks’ financial year 2022 results compiled by Mouthy Money, August 2023.

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Q: My mortgage is ending soon, but I’m worried I won’t be able to afford paying much more than I currently do. What are my options? 

A. Many homeowners are worried about rising interest rates at the moment, particularly those who are coming to the end of a currently low deal and unsure what to do next. Rates are higher so it’s hard to avoid any increase, but it will help to plan ahead. 

A good starting point is to check exactly when your current mortgage deal is coming to an end. It’s important to avoid moving on to your lender’s Standard Variable Rate (SVR), as these tend to be considerably higher than other rates available, whether fixed or variable. 

If your mortgage is up for renewal within the next six months, then it’s possible to review your options now. Most lenders’ offers will be valid for up to six months, which allows you to secure a deal now whilst still in your current deal.   

Fixed rates have been rising so that can help you grab a rate now but still gives you the option to review it again to check it is still the best rate for you nearer the time. 

Have a think about the type of deal you want to go for next. Variable or tracker rates are often the cheapest options, but these rates will go up and down as interest rates change. If you would prefer more certainty in your budget, then a fixed rate deal will offer you more peace of mind. 

The Bank of England base rate has risen rapidly from its historic low and the market anticipates that there could be more to come.  As a result fixed rates are much higher and variable rates could rise again if interest rates do climb. 

It may be possible to consider some additional changes to your mortgage that could help mitigate any increase in payments. Switching to an interest-only mortgage would cut the payments but if you go down this route, you aren’t reducing the mortgage balance so it needs careful thought about a repayment strategy over the longer term.  

Extending the term of a repayment mortgage will also reduce monthly payments. However, that also comes at a cost and the total interest over the life of the mortgage ratchets up substantially, so it makes sense to try and peg that back later or overpay as your circumstance changes. 

The Government has also recently announced a range of options put in place to support customers who are up to date with their mortgage payments but worried about managing the increased costs. The Mortgage Charter includes the option to extend the mortgage term, or to temporarily switch to interest-only for six months.

If you’re worried about managing your new monthly payments then it makes sense to talk to your lender sooner rather than later as they will be keen to help and talk you through your options. 

David Hollingworth is Associate Director of Communications for L&C Mortgages, the UK’s leading fee-free mortgage broker offering advice to borrowers from across the mortgage market. David is regularly called on to provide commentary on the mortgage market by the national and trade press as well as broadcast media. This ranges from giving opinion on new product developments and the pros and cons for consumers, through to providing a wider perspective on topical market issues, trends and initiatives. 

Photo Credits: Pexels

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From central London house prices falling, to supermarkets influencing shoppers and what UK unemployment and wage growth changes mean for you – here are our favourite must know money stories this week to help you get your head around your personal finances. 

Central London house prices suffer 

Central London property prices dropped almost 5% in the 12 months to March, reports Joshua Oliver for the Financial Times. This was the largest annual fall in three and a half years, with the price of property in prime areas of London dropping to £1,261 per square foot last month, down from £1,326 a year earlier. 

According to data provider LonRes, this is the lowest level since mid-2021. Anthony Payne, managing director at LonRes said: “The steam has come out of the market. It was a bit inflated last year.” 

Buyers have become more cautious over concerns prices could still fall further thanks to a combination of factors including concerns over the economic outlook and rising interest rates. 

James Forbes, director at London estate agency Forbes Gilbert-Green expressed his longer-term concerns around London maintaining its position as a global financial centre. ‘Brand London’ is the core of the housing market in Central London, and it is essential for it to remain positive to drive investment, he said.  

How supermarket loyalty cards influence buyers 

Gone are the days when loyalty cards encouraged shoppers to build up points to redeem at supermarkets. Now, supermarkets are rewarding financially-stretched customers with immediate discounts in the hopes of retaining their business, amidst the soaring cost-of-living, writes Kevin Peachey for BBC News.  

Supermarkets – such as Tesco, Sainsbury, and Boots – have repositioned their customer loyalty strategies toward day-to-day discounts, to try and compete with other discounters. Even the discount labelling is carefully chosen – for its warm and welcoming ‘yellow’ colour – attracting customers eyes and marking a change in tactics by retailers. 

However, the pitfall for shoppers is that these loyalty card discounts make it more difficult to compare prices and work out value for money. 

Consumer insight specialist Kate Hardcastle said that supermarkets: “Are reminding you that if you are loyal, they are literally treating you differently as a customer. They want a narrative that they are the best and the cheapest.” 

Retailers are also exploring potential options for loyalty programmes to reward sustainability. The clear benefit for companies is that they can meet their eco targets and boost sales because loyal shoppers will return to the brand for their next purchase. 

What do UK unemployment and wage growth mean for you? 

Wage growth remained at 5.9%, a higher level than expected, according to data from the Office for National Statistics (ONS). However, this could prompt the Bank of England to hike interest rates again, reports Nicole Garcia Merida for Money Week.  

While growth in regular pay, excluding bonuses, held at 6.6% as of February 2023, inflation has been eating away at pay growth. When adjusted for inflation, real pay fell 2.3%, and total pay fell 3%. 

Unemployment rose slightly to 3.8% from 3.7% in January, reflecting business uncertainties as employers held back on recruiting due to economic pressures.  

The International Monetary Fund (IMF) expects the UK economy to shrink by 0.3% this year. Since the end of 2022 the UK economy has remained largely stagnant. Rising wages will mean businesses might continue increasing prices, pushing inflation higher and prompting the BoE to continue hiking rates.  

Photo Credits: Pexels

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If you’re a regular saver, you’ll have noticed that savings rates are much higher than they used to be.

It means after years of pitifully low savings rates, savers can once again make relatively decent returns on their money.

That is because the Bank of England (BoE) has hiked base rate – the UK’s most important interest rate – by 4.15 percentage points to a 14-year high of 4.25% over the past 15 months.

When interest rates rise, the rates on loans tend to rise, meaning borrowing becomes more expensive. But, on the upside, savers get higher rates of interest on their cash – in theory.

However, while banks are hitting borrowers with higher borrowing costs, they have been slower to pass on rate rises to savers.

For example, over the past year base rate has increased by 3.5 percentage points.

However, according to data firm Moneyfactscompare.com, the average easy access savings rate has risen by just 1.6 percentage points.

Over the same period, the average two-year fixed rate mortgage has rocketed by 2.67 percentage points, the firm’s data shows.

Banks are not obliged to pass on interest rate rises in full to savers. However, Unite, the trade union, accuses banks of ‘pickpocketing’ their customers by not doing so.

The trade union claims the big four UK banks – Barclays, HSBC, Lloyds and NatWest – have already made an extra £7bn profit from rising interest rates.

The banks have made this extra money by raising interest rates for borrowers and not passing on rate rises in full to savers, it says.

Unite’s general secretary Sharon Graham hasn’t minced her words about the situation, either.

She says: “The banks have already made billions in extra profit from interest rate rises. If the [Bank of England’s Monetary Policy Committee] raises rates again they stand to gain even more. Banks treat these rises as a licence to pick the pockets of householders across Britain.”

There is no doubt that banks are coming under increased scrutiny on this issue. The Big 4 banks have all been hauled in front of The Treasury Select Committee (TSC) this year to explain themselves.

Meanwhile, the TSC has written to City regulator to ask whether banks are making disproportionate profits from dragging their heels on savings rates.

Here at Mouthy Money, we will be watching carefully. Too many banks have no interest in being fair or transparent and that simply isn’t good enough.

In the meantime, don’t accept sub-par savings rates. Shop around to find a better deal for your savings using a savings comparison site.

Photo Credits: Unsplash

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