What are interest rates?

This page was last updated on 5 May 2022

An interest rate tells you how high the cost of borrowing is, or high the rewards are for saving.

So, if you’re a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back, for a loan of a given size.

If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit.

Even a small change in interest rates can have a big impact. It’s important to keep an eye on whether they rise, fall or stay the same.

What is Bank Rate?

‘Bank Rate’ is the single most important interest rate in the UK. It is our job to set this interest rate. We explain why we decide to keep the rate the same or change it in our Monetary Policy Report.

In the news, it’s sometimes called the ‘Bank of England Base Rate’ or even just ‘the interest rate’.

Bank Rate influences lots of other interest rates in the economy. That includes the lending and savings rates offered by high street banks and building societies.

For example, in 2020 we cut Bank Rate to 0.1% at the start of the Covid-19 (coronavirus) crisis. This reduced the rates at which high street banks could borrow money from us, which in turn meant they could lend to their customers at lower rates.

Banks lowered the interest rates on some loans, such as mortgages, but also offered lower interest rates on some savings accounts.

Since then we’ve put Bank Rate up to 1%. We expect that increase to be reflected in some mortgages and savings.

Why are there so many different interest rates?

The number of different interest rates available when you borrow or save can be confusing.

The interest rates high street banks set depend on more than just Bank Rate.

For loans, other factors are considered, including the risk of the loan not being paid back.

The greater the lender thinks that risk is, the higher the rate the bank will charge. It can also depend on how long you want to take out a loan or mortgage for.

You can use our interactive chart to see how interest rates of different financial products have changed over time. Choose a product from the drop down menu in the ‘enter the series’ box.

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Why do interest rates matter to me?

Play Why do interest rates matter to me? video

Bank of England's KnowledgeBank guide to why do interest rates matter.

Hi, my name is Geoff and I work at the Bank of England. Today I’m going to tell you about interest rates. Interest rates were cut sharply in 2009 and remain extremely low by historical standards. With rates so low for so long do they really matter anymore? Yes they do.

Whether you’re running a business or a family on a budget, interest rates continue to affect our daily lives and have a big impact on what’s left over to spend on essentials each month. For most, interest payments on a mortgage are one of the biggest outgoings. Covering the cost of spending on credit cards and pay day loans can also be a big drain. Many of those with savings rely on interest payments from the bank to provide essential income to live on. So whether you’re a saver or a borrower, the level of interest rates for you and your family, really does matter.

If interest rates rise, borrowing could become more expensive for you. Whether you are looking to get a mortgage to buy a house, or a new car on credit, it’s crucial to think about what higher costs mean for you.

Imagine you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 2.5%, the monthly repayment will be £583.

But if the interest rate is 1% higher, the monthly repayment will be higher, at £651.

Of course, interest rates can go down as well as up. If the mortgage interest rate was 1% lower, the monthly repayment would be around £520.

It’s very important that you understand how a change in interest rates could impact your ability to pay.

It’s key to understand how a change in interest rates could impact your money. You can use a mortgage calculator to work out how your monthly payments might be affected.