Toy story: The impact of interest rates

Posted: November 4, 2017 in News

The Bank of England has raised interest rates for the first time in a decade.

The Bank of England base rate is one of the main figures used by financial providers to set prices of loans or savings products.

The base rate, typically known as interest rates, is set each month by the Monetary Policy Committee and had been at record lows of 0.25% since August 2016.

But amid increasing numbers of people getting into debt, the Bank of England was concerned that people were relying too much on credit, so has increased interest rates to 0.5%.

This may be good news for savers as banks and building societies use the base rate as a starting point for pricing their own products, so they technically could now offer better returns for your money  (that obviously doesn’t mean they will!) so you could earn more interest and save up for that mortgage deposit or special event faster.

The downside is that banks also use these rates as part of their pricing for mortgages. So the cost of home loans could increase and those on tracker or standard variable rates, which typically follow the base rate, will see their monthly repayments increase.

There is of course an argument that if you can’t afford a 0.25% increase in mortgage payments, then maybe you shouldn’t have a home loan. But that’s for another day.

Here is a simplified explanation of the impact of the interest rate rise using Sylvanian Families:

interest rate rise.jpg

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