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.