The smallest change in interest rates can have a large impact. The Bank of England raised interest rates to 0.75% in March, which could add on around £300 a year to a 2.25% variable rate mortgage deal of £200,000.
The Bank is expected to raise interest rates again, possibly up to 1%, with the latest decision set to be this Thursday (May 5).
With interest rates constantly changing and affecting mortgage rates, you may be wondering what exactly are they and when were they at their highest? Here are all the answers.
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What are interest rates?
Interest rates tell you how high the cost of borrowing is, or how high the rewards are for saving. Sometimes referred to as the Bank of England Base Rate, a bank rate is the most important interest rate in the UK. It is the Bank of England’s job to set the interest rate.
The interest rate will be most familiar with many people as being the amount you are charged for borrowing money, which is usually shown as a percentage of the total of the loan you take out. If the interest rate is a higher percentage, then that usually means you have to pay back a higher percentage of your loan, which means you have to spend more money.
If you're someone who is looking to save money into a bank, the savings rate tells you how much money will be paid into your account. This will again be a percentage of the money that you current have saved, and if the savings rate is high, then that means more money will be paid into your account for a given sized deposit.
Bank Rate also influences various other interest rates in the economy, which can include savings and lending rates that are offered by building societies and high street banks.
When were mortgage rates at their highest?
A mortgage rate is the rate of interest charged on a mortgage. Mortgage rates are determined by the lender and can be either fixed, staying the same for the term of the mortgage, or variable, fluctuating with a benchmark interest rate. The rates can vary for borrowers based on their credit profile.
Mortgage Rates in the UK averaged 5.62 percent from 1995 until 2022, reaching an all time high of 8.87 percent in September of 1998 and a record low of 3.59 percent in November of 2021.
Today, the ever-tightening cost of living crisis and soaring inflation (a general increase in prices and fall in the purchasing value of money) is fuelling more interest rate rises this year.
The rise of inflation and interest will put further pressure on the monthly budgets of millions of mortgaged UK homeowners.
Why were UK interest rates so high in the 80s?
The 1979 Conservative government played a big part in the UK's large interest rates during the 80s.
The leader of the Conservative government Margaret Thatcher increased interest rates to 17%. The government of the time saw raised interest rates as a critical weapon in combating inflation, which was steadily rising at the time.
In 1982, inflation dropped down to 9%. Despite its effect of reducing inflation, critics noted its negative impact on UK manufacturing exports.
Interest rates began to rise again towards the end of the 1980s, partly under the pressure of house price rises. By October 1989, interest rates were back to 14.88%.
