Here at the Bank of England we set the key interest rate in the economy known as Bank Rate.Next
But Bank Rate is typically well below the interest rate you would pay on your mortgage. Why is that?Next
Well first your mortgage lender needs to account for the risk that you won’t be able to pay back your mortgage.Next
The greater that risk, the higher the interest rate the lender will charge. For instance, if you’re borrowing a large amount relative to your deposit, then the risk is higher, and you will likely be charged a higher mortgage interest rate.Next
Your lender also needs to add on the costs it faces when offering a mortgage – such as its administration costs and paying its staff.Next
So it’s Bank Rate, plus the riskiness of the loan, plus the other costs involved, that makes up your mortgage interest rate.Next
Charging an interest rate that reflects all the costs and risks involved is important: lending needs to be profitable if banks and building societies are to keep on providing loans.Next
So that’s why your mortgage rate is higher than Bank Rate.Finish
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“So can you tell me why our mortgage rate is higher than the bank rate?”Next