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Word of the Week – Interest Rate
An interest rate is the cost of borrowing money or the return on investment when you lend money or deposit it in a savings account. It’s usually expressed as an annual percentage of the amount borrowed or invested.
Types of interest rate:
- Base Rate: The Bank of England sets a “base rate,” which is the interest rate at which commercial banks borrow from the Bank of England. This rate influences the interest rates that banks charge their customers for loans and mortgages, as well as the rates they offer on savings accounts.
- Fixed Interest Rate: This is an interest rate that remains constant over a specific period. For example, if you have a mortgage with a fixed interest rate, your monthly payments will stay the same for the duration of the fixed term, regardless of changes in the base rate.
- Variable Interest Rate: A variable interest rate can change over time, often in line with the Bank of England’s base rate. For instance, if you have a loan or mortgage with a variable rate, your payments might increase or decrease depending on changes in the base rate.
- APR (Annual Percentage Rate): This is a broader measure of the cost of borrowing, including not just the interest rate but also any additional fees or charges. It’s a useful figure for comparing different financial products.
Interest rates have important implications for households, businesses and the wider economy. This is why the Bank of England tries to manage its base rate accordingly to produce the best outcomes for all considerations.
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