How do base rate increases affect my commercial loan?

Right at the end of 2021 there was some important news from the world of finance – and it could affect how much you pay on the money you’ve borrowed.

Let’s fill you in on what you need to know and give you some pointers regarding the funding that you’re currently repaying.

The Bank of England has increased interest rates

In December 2021 the Monetary Policy Committee voted in favour of increasing the Bank of England base rate from 0.1% to 0.25%. This is the first increase in more than three years. The rate has since risen to 0.75%.

Base rate is used by the Bank of England to charge other banks and lenders when they borrow money, which means an increase can have an effect on how much borrowers pay.

Variable or Fixed?

The increase in the base interest rate to 0.75% will affect you differently depending on whether your loan is a fixed or variable rate.

Fixed rate

If you have a fixed rate, the change might not affect you immediately, but it could in the future. It’s worth checking to see when your fixed rate term comes to an end, as typically loans will then revert to a variable rate. If the fixed rate ends in the next 3-6 months it’s worth thinking about what your alternative funding options are.

Variable rate

For borrowers on variable rates linked to base rate the amount you’re paying in interest will increase. This is because lenders typically charge an interest margin plus base rate. The margin (the amount the bank makes) will stay the same, but as base rate has increased the overall interest you pay will increase.

Will base rate rise even further?

While we don’t know what will happen next, or when further changes will be made, we do now know that the Bank of England is willing to act. They’ll likely give the latest change some time to make an impact on the economy before making further changes. We can also observe that base rate remains incredibly low so the only likley direction it will go over time is upwards.

What can I do to reduce my risk?

If you have commercial finance that may be affected by these changes it is worth getting advice to see whether it’s worth refinancing this onto a fixed rate product.

Speak to a member of our team who can see if you are eligible to apply for a more competitive fixed or variable rate, and show you what the pros and cons would be.