To put it simply, an interest rate is a percentage charged on the total amount you borrow or save. Small changes in interest rates can have a big impact. Therefore, it’s important to keep an eye on whether they rise, fall, or stay the same.
If you’re a borrower, the interest rate is the amount you are charged for borrowing money. This is a percentage of the total amount of the loan. You can borrow money to buy something today and pay for it later. Interest rates is essentially what you pay for the privilege. It’s a bit like hiring a car. Interest is what you pay to ‘hire’ someone else’s money.
If you’re a saver, it’s the same except the interest is paid to you. This is because banks are paying to hire your money.
Bank Rates
A ‘bank rate’ is the single most important interest rate in the UK. It is sometimes also known as ‘Bank of England Base Rate’ or even just ‘the interest rate’.
Many brokers or mortgage advisors will use bank rate in their dealings with other financial institutions. This can influence lots of other interest rates in the economy, including the various lending and savings rates offered by high street banks and building societies.
In 2020, bank rates were cut to 0.1% during the Covid-19 pandemic. This reduced the rates at which high street banks could borrow money from the Bank of England. Banks lowered the interest rates on some loans, such as mortgages, but also offered lower interest rates on some savings accounts.
The different types of interest rates
There are a number of different interest rates available, so whether you’re borrowing or saving, this can be confusing. The interest rates high street banks set depend on more than just the bank rate. For example, for loans, other factors are considered, including the risk of the loan not being paid back. The greater the risk, the higher the rate the bank will charge.
What is APRC?
APRC stands for Annual Percentage Rate of Charge, and should not be confused with APR. It shows you the total cost of a mortgage, including fees, over the entire term of the loan. This is usually 25 to 30 years.
They give a more realistic view of how much mortgages will cost over the long term. Alongside the affordability checks that lenders have to carry out, they also help borrowers avoid taking on debt that they later find they can’t manage.
To understand more mortgage terminologies, check out our glossary here.
Tax on savings interest
If you’re a UK taxpayer, you’ll probably have to pay income tax on the interest you earn on your savings. The only exception to this is having a Cash ISA. However, most UK adults have a personal savings allowance allowing them to earn up to £1,000 interest on their savings without paying tax if they’re a basic rate taxpayer. Higher rate taxpayers can earn £500 interest tax free.
