As with many professions and industries, technical jargon can become difficult to understand. In the financial services sector, this is no exception! You will probably be aware of Fixed Rate, Standard Variable Rate, Capped, Tracker and various other definitions for the interest rate you are required to pay on your home loan.
But how are these rates set and why?
There are largely two main factors that drive interest rates in the UK mortgage market. They are The Bank of England’s Base Rate and LIBOR (The London Inter-bank Offered Rate). The Bank of England’s Base Rate is the official bank rate for the UK. It is the interest rate that the Bank of England charges banks for secured overnight lending. Banks will then add a profit margin to this when lending to their customers.
For example, a bank might offer a loan to a customer on variable terms linked to the Base Rate. This might, for example, be 2.5% over the base, etc. Lenders also offer loans linked to LIBOR on a similar basis.
Alternatively, lenders may offer special ‘introductory’ rates to bring customers in. These are usually known as fixed, capped or discounted rates and they are usually significantly lower than their Standard Variable Rate (SVR) which is a rate the lender will set itself, usually based on the Bank of England’s Base Rate.
The UK Government’s monetary policy is implemented by the Governor of the Bank of England, who is tasked with controlling various financial indicators, such as the rate of inflation, by setting an appropriate Bank of England Base Lending Rate. In other words, he controls the money supply in circulation by setting the base price of borrowing money.
You can, therefore, see that the Bank of England’s Base Rate is very important to borrowers and savers alike as it effectively sets the rates that banks subsequently offer savers or charge borrowers.
At the moment, the Bank of England’s Base Rate is at a historic all-time low. In simple terms, this means that a borrower can borrow more money for a lower monthly repayment. But given the prevalence of discounted offers in the mortgage market, offering loans at very low rates for say 2 or 3 years, it’s critical that borrowers make sure they periodically speak with their mortgage broker to make sure that their mortgage remains good value.
Analysts are predicting further rate cuts this year, with the next one possibly coming down to 4% when the Bank of England’s Monetary Policy Committee meet on Thursday 7th August 2025.
The Financial Conduct Authority (FCA) has shared new changes to mortgage rules with the aim to simplify remortgaging, and encourage competition within the mortgage market.
7 days ago
Lloyds Banking Group has jumped on the bandwagon to boost lending for first-time buyers as they allocate an additional £4 billion to help first-time buyers on to the property ladder.
As the Loan to Income (LTI) cap has been increased to 5.5 times income, applicants who fit the First Time Buyer Boost criteria could borrow up to 22% more.
The government is introducing mortgage reforms to boost homeownership, stimulate economic growth, and make the housing market more accessible, especially for first-time buyers.
Chancellor Rachel Reeves has announced the most significant mortgage reforms in over a decade—great news for those dreaming of homeownership.
10 days ago
Nationwide ease their ‘Helping Hand’ mortgage designed to help first-time buyers get onto the property ladder by allowing them to borrow up to six times their income.
16 days ago
Keeping the kids entertained over the six-week summer holidays isn’t always easy, especially with the cost-of-living making it even more difficult. Below is a list of fun, inexpensive ideas to do over the break
The Financial Conduct Authority (FCA) has published a discussion paper about the future of the mortgage market in a bid to improve access for first -time buyers, self-employed, and those borrowing in retirement.
Ever wondered where the most reasonably-priced towns for families to buy are? Property company, Zoopla has identified the top 10 towns for families to live in the UK by looking at the most affordable towns, and how many people are looking in that area.