What is going to happen to the base rate and how will it affect remortgages?

3 November2009

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In March this year, the Bank of England dropped its base rate to an unprecedented 0.5%. It was an attempt to encourage lenders to cut the cost of lending - by making it cheaper for them to get the necessary funds - and thereby give the economy a boost.

But with signs that the economy may come out of recession in the final quarter of 2009, there is speculation about what will happen to the base rate. It`s impossible to accurately predict when and how the base rate will change, but here`s a look at what could happen to remortgages in various scenarios.

Base rate falls

Although it`s a very unlikely scenario (due to the already very low base rate), the Bank of England could lower its base rate further if it felt that this would improve the lending markets. Indeed, the US base rate currently stands at 0-0.25%, while Japan`s is 0.1%.

This would, to an extent, reduce the cost to banks and other mortgage providers, meaning they might lower their rates to consumers further.

Base rate stays the same

This is the most likely scenario for the next few months, according to many economists, with some predicting that the base rate could stay at 0.5% for most - if not all - of 2010.

This doesn`t, however, mean that remortgage rates would remain the same, as lenders may wish to make their deals more (or less) competitive compared with other lenders` mortgages.

Base rate increases

Although lenders and borrowers tend to benefit from a low base rate, savers suffer, as their returns are lower - so not everyone wants the base rate to stay low.

If the base rate did increase, it`s likely that lenders would increase the cost of their remortgage deals to compensate, although some lenders may hold back on any increases in order to attract customers.

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Tags: remortgage, mortgage, base rate, base rates, mortgage rates