What the BoE's interest rate rise means for you and your money 📈

Rob Braileanu

 · 08/02/2018  · 08/02/2018

The Bank of England has raised the base interest rates from 0.5% to 0.75% today. Find out what this means for you and your money from the Revolut Blog.

The base rate, also known as the bank rate, is a key interest rate set by the Bank of England. It is generally used as a reference point for banks and financial institutions to work out how much interest they pay savers and charge borrowers.

Why did the BoE raise the interest rates? 🤔

While there are a number of factors that go into this decision, the main driver for the Bank of England to hike interest rates has to do with keeping the rising cost of living - otherwise known as inflation - under control.

The decision comes as a result of a strengthening economy, better employment prospects, increased consumer spending and the possibility of wage rises.

Generally speaking, a rise in the base rate is perceived as a positive change for the economy, although as with everything in the world, there will be both winners and losers.

Who are the winners and who are the losers? 🤷🏻‍♀️

Like we've said before, a rate rise usually benefits savers but hurts borrowers. This happens because the base rate set by the BoE is used by many financial institutions to work out interest rates paid to savers and charged to borrowers.

To this end, any form of debt - be it from credit cards, mortgages or loans - could see a slight increase in the interest charged to the borrowers.

This is particularly important to people who have purchased a property through a standard variable-rate mortgage - because the interest you pay back varies over time, there will most likely be a slight increase in your payments. Whilst most lenders follow the base rate, they are set by each individual lender, so it's worth checking with them what the changes will be and when they'll come into effect.

To put things in perspective, for an average outstanding balance of around £100,000 payable over a period of 20 years, the current base rate could see a £150 rise in the cost of repayments over a year.

Fixed-rate mortgages (of which 70% of all UK mortgages are) might not be affected in the short term since these type of loans will have their interest rates locked for a period of 2 to 3 years, on average. However, as soon as the period is up, borrowers should expect to see an increase to reflect today's interest rate hike.

Tracker mortgages will definitely go up by the same amount as the base rate, but this isn't neccessarily an immediate hike in price. If you have this type of mortgage contact your lender to ask when they plan on making the change.

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There's light at the end of the tunnel 💡

It's not all bad news - savers should welcome the BoE's announcement since the interest paid on savings accounts should go up (at least in theory).

In reality, this depends mainly on your bank or building society's internal policies and, more recently, around half of all savings accounts held in the UK did not increase their interest payouts after the BoE's last rate hike in November. Take the opportunity to shop around and make sure you're getting the best rate possible - and if you're not, don't be afraid to make a switch.

Despite all this, it's worth noting that the base rate was only at a record low because of the economic crash back in 2008 and even with this rise, the rates are still considerably low compared to the extrodinarily high-rates that were seen since the 80's.

Mortgage providers are starting to make affirmitive decisions about what they're going to do and when changes will be passed on to you, the borrower, so check with your lender as to how much your repayments will be going forwards.

Does the rate hike affect my Revolut account? 📲

In short, no, and the reason is simple - since Revolut does not charge or offer interest, the rate hike will not affect your account.

'But what about the credit feature Revolut is working on' you might ask?... Well, rest assured, keen borrower - our credit team have confirmed that today's hike will not impact the cost of our soon-to-be released line of credit products:

"The interest rate rise is a strong signal of the Bank of England’s confidence in the economy, the fact that Bank of England is willing to use it tools to tackle risks of inflation is a strong positive signal. We don’t expect the rate rise to impact the features and costs of the credit products on our roadmap, our focus throughout our product development has been on delivering innovative products at competitive prices."
Cassy Raby - Revolut Credit Underwriter

While Governor Mark Carney has been suggesting for some time that rates would rise modestly, the implications on your bank balance may come as a bit of a surprise - good or bad. As always, politics and monetary policy go hand in hand - so when the final Brexit deal comes to fruition all bets are off - all we can do is watch and wait.

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