August 2016 ushered in the lowest ever Bank of England Base rate at a staggering 0.25%. To put this in perspective, the highest Bank of England Base Rate was set at 15% during the Summer of 1990.

But why is the Bank of England Base Rate relevant to the homeowner?

The base rate is set by the Monetary Policy Committee of the Bank of England. The Bank is independent from Government and its committee sits every month. The base rate is the rate of interest that it is prepared to pay other banks on deposits they lodge with the bank. It effectively sets parameters upon which other banks and lenders are encouraged to lend. Of course, those lenders add a margin for profit and so homeowners will be used to being quoted a lending rate based upon the base rate plus a margin, perhaps 0.5 - 2%.

After the credit crunch in 2008, many banks stopped lending on terms relating to the Bank’s base rate (which was reduced to 0.5%) and instead they encouraged lenders to borrow on LIBOR (The London Interbank Offered Rate). This is the rate set by the larger banks and defines the rate at which they are prepared to lend money to each other on a short term basis.

Overnight LIBOR is currently 0.4% at the time of writing.

The Bank of England uses its base rate to regulate lending and money supply. As money becomes more expensive, the cost of borrowing rises, reducing demand in the economy and thus reducing prices of assets, including houses. However, post 2008 the economy has been struggling and with interest rates already very low, the ability of the bank to encourage economic activity has been limited. In fact, it has taken the unusual step of ‘creating money’ through what is somewhat creatively called ‘quantitative easing’.

Of course, during this time of low interest rates and low unemployment and a growing population and demand for homes, especially in the South East, house prices have been resolutely on the up. The great unknown is what happens if inflation rears its ugly head or, perhaps worse still, deflation takes hold. The Bank’s ability to control the economy is seemingly hamstrung with interest rates now at 0.25% and some say that simply creating more and more money risks unbounded financial catastrophe in the future.

In the meantime, the homebuyer is enjoying historically low levels in the cost of mortgages. In the short term at least, this will continue to be welcomed by home owners.

For more information speak to a mortgage adviser on 01628 507477 or contact us .

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