What are interest rates?published at 11:10 BST
Interest is the extra amount you get charged when you borrow money. So, if someone lends you £10 at a 10% interest rate, you’ll pay them back £11. That’s the £10 you borrowed plus an extra £1 (10% of £10) in interest.
The Bank of England sets a base interest rate, also known as the Bank Rate, which is what it charges other lenders to borrow money.
The base rate is the most important interest rate in the UK as it influences all other interest rates. When it changes, it affects the loans and savings deals that High Street banks and building societies and other lenders charge their customers.
What happens when interest rates change?
When interest rates rise, it becomes more expensive to borrow money and, when they drop, it becomes cheaper. Interest rates rose after the Covid pandemic – climbing to more than 5% before falling back.
If the base rate goes up, the monthly repayments on mortgages tend to go up too, but this depends on the type of mortgage you have.
If you have savings, higher interest rates should mean the interest you earn goes up – since you’re basically lending the bank your money.
Image source, PA Media
