Sarah Poynton-Ryan 0:01
Money matters. I wish that I knew tall when I was an investor, a business owner and a money educator, understand it better compound international budget investment to recover from debt. No one explained to me that your money to align us at work is about normalizing the conversation. I

Unknown Speaker 0:20
Hey, Money

Sarah Poynton-Ryan 0:27
Mechanics. It's Sarah Poynton, and welcome to this episode of The Money Mechanics podcast. If you're over there on YouTube, listening, watching, hello, hello. If you're listening on audio only, hello to you. So this episode actually is being done because we had a question come into the podcast. And the question was, what is actually an interest rate and how? Why does the Bank of interest rate matter to me as an individual? This came from a young person, let's say a young adult. They were 25 and she currently rents, and she's starting to learn more about mortgages and things like that. And the question was, what is an interest rate, and why does it matter to me? So I thought I'd do a whole episode on this, because it's actually quite an important aspect of our money. And sometimes when we see the news and we read the paper or whatever, and we see Bank of England changes interest rate, or it holds or it drops, or it goes up, or whatever we might think, you know what? That's really far away. Doesn't really matter to me. It doesn't really impact me. But actually, the interest rate, the Bank of England base rate, impacts all of us regardless. So let me tell you, first of all what it is. The best way that I can explain it is that it's like a rental fee for borrowing money. So if you borrow money, the person lending it to you, or the organization, the bank generally lending it to you, will charge you a fee, like a rental fee for having that money. So they might lend you 20,000 pounds, but then they charge you an interest rate, which is the cost of borrowing that money, right? So that's what an interest rate actually is. So when you save money, an interest rate matters because the bank will pay you an interest rate. When you borrow money, your interest rate matters because you'll be charged an interest rate. So regardless of whether you've got some money or no money, or less than no money, an interest rate impacts all of us. So you've got to understand what this means, and how it affects you. So you have the Bank of England base rate, which is at 5% and that Bank of England base rate, when the Bank of England puts the base rate up or reduces the base rate, what they're actually doing is impacting inflation. So they use this base rate to control inflation. And inflation, for those of you that don't know, is the figure that's used to demonstrate the value of our money and the way that we can use our money to buy the essentials. So you know, if you have 100 pounds, how much of the essentials Can you buy? Food, petrol, milk, you know, all of these sorts of things. And what they do to assess inflation is they look at the cost of all of those things, and whether or not those costs are going up or coming down, and the Bank of England will adjust the base rate, the base rate, sorry, to control inflation now, over the last couple of years, actually, last year, maybe before, inflation was up at 11% currently, inflation is at 2% right? So what the Bank of England did is they put interest rates up. When you put interest rates up, it stops people from spending. It's it puts the cost of borrowing up. So companies are impacted. All of us are impacted. So what that does is people behave with their money differently, and then inflation starts to trickle down. So now we've got interest rate down, sorry. Inflation rates down at the 2% mark, the base rate is starting to come back down, which is great if you are somebody who is borrowing money. So if you see the bank, or you hear the Bank of England raising their rates, the likelihood is they're kind of hitting the brakes to slow things down in the market. What they want to do is encourage less borrowing, less spending. They're making things more expensive, and that's because they want to hit the brakes on the economy. They want to just slow things down with lowering the interest rate. What they're actively doing is trying to, like, step on the accelerator. So they're trying to speed things up. They're trying to get companies to borrow more, get borrowers like you and me with credit cards to borrow more. What they want to do is for us to be spending more. So by lowering the interest rate, it becomes less expensive to borrow money, so we borrow more, we spend more, and it triggers the economy in a positive way when they raise the rate, what they're trying to do is hit the brake. So that's the core difference, and what it means in real terms. So why should you care about the interest rate? Because you might be thinking to yourself, Well, yeah, Sarah, that's fine, but I don't want to borrow any money, and I haven't got any savings. So why does that matter to me? Well, because when interest rates go up, a lot of you. Watching this, and you'll be renting, right? And over the last, you know, year, two years, five years, 10 years, rent rates have gone up a lot. What's triggered that? One of the biggest triggers of that is because borrowing interest rates have gone up. So if a landlord has a mortgage on a property, and let's say their mortgage is 500 pounds a month currently, that they pay to the bank, and your rent, let's say your rent, let's say your rent is 800 pounds a month. So you pay 800 pounds, the landlord pays 500 pound to the bank for their mortgage. They probably pay for your maintenance, insurance, all those sorts of things. And maybe they might see 100 pound a month out of that 800 pounds at a push. Well, if rates go up, that 500 pound they have to pay to the bank might go up to 650 pounds a month, but your rent at 800 pounds means they're going to make a loss every month. So what they'll do is they'll put the rent up to be able to put more money towards the increase in the borrowing costs of their mortgage. And actually, over the last few years, that's been the biggest impact on rent. Values is the actual borrowing costs for having the mortgages on the houses that tenants live in. So it matters whether you know you might not have savings and you might not be borrowing money, but if you're renting, for example, it has a massive impact on you. It's going to cost you more to live in your house. So if you're someone who does save, then when rates go up, that's a positive thing, because the interest rate that you're going to be paid for having your money sitting in a savings account with a bank that's going to go up. However, in the last year, interest rates went up to 7% and savings interest rates did not reflect that. So the bank doesn't have to pay you that on savings, they can still, I mean, actually, they're sticking around the kind of three 4% in a lot of cases in the banks. At the moment, even though interest Bank of England base rate is higher, banks don't have to pay you interest rates in line with the Bank of England base rate. It's just a suggestion, right? So savings, when interest rates go up, it can be a positive thing, but it's not always. When rates go down, it's cheaper for people to borrow, right? We said that. So what it means is it's quite good for loans, but you will earn less from the savings that you've got. So rates are coming down actually, if you know your bank accounts got 4% as your interest rate at the minute, and you've got, let's say you've got 1000 pounds in there. Well, you'll be earning your interest at that 4% interest rates come down to 321, percent. You'll be earning less money every month on your savings. So again, it does impact you, and it does impact us all, actually, because not only do we have our own personal finances, but all of the companies that we buy services and products from, they will have borrowing in their businesses. So if you've got a company that uses debt and uses borrowing to be able to stay afloat, or to be able to buy their stock, whatever it might be if interest rates go up, usually, the impact of that is that the cost of running their business goes up, which means the cost of their products goes up, the cost of their supply chain goes up. Everything goes up, whereas when rates come down, often, they can then buffer that by bringing prices back down. They don't always, but they can do now,

the interest rate is commonly talked about, and probably what you'll be more aware of is how it impacts mortgages. Mortgages have an interest rate attached to them because it is that rental fee on borrowing money but to buy that house. So what will happen is the Bank of England base rate will be set, and as it goes up and down, that informs the banks what they should charge you to lend you money. So if the Bank of England base rate is 5% often, what mortgage companies do is they'll say it'll be 1% above the Bank of England base rate, right? And as you're if you've never applied for a mortgage, that might not make any sense to you at all. If you do ever apply for a mortgage, you'll see that your product that you'll get, or the loan that you'll get, the terms will be, often 1% over the Bank of England base rate or or that that will be, it will use the Bank of England base rate as the starting point for explaining what you're going to pay. Now, there's two different types of mortgages. You've got variable rate mortgages and you've got fixed rate mortgages. Okay. Now a fixed rate mortgage is a mortgage that it doesn't matter what the Bank of England base rate is doing, you will always pay the same amount of money. Okay, so a fixed rate mortgage, typically you would fix for maybe two years or three years or five years, or, you know, you can fix for 30 years, just depends on what's happening and what you're actually buying. You will then know on day one that your monthly payment is going to be, let's say 500 pounds. That's fixed. Is fixed at 500 pounds every month for the next three years, let's say with a variable rate mortgage. Month one might be 500 pounds, but if interest rates go up, month two might be 700 pounds. If. Interest rates come down month three might be 200 pounds. Okay, so that variable rate mortgage is the one that's impacted the most by interest rate changes while you're in a product with a mortgage company. So again, there's the argument of, should you get fixed rate, or should you get variable this is a definitely a personal choice, and I totally can't advise you either or I've had both in my time. I've had variable and I've had fixed and I've currently got variable and fixed on my portfolio as well. The key to this is knowing what's right for you. If you are someone that needs to be on solid ground and needs to know exactly what their outgoings are every single month, and actually for you guys as Money Mechanics, getting in control of your money is quite a priority. Being on solid ground and knowing what it's going to cost you every month probably is a priority. And if that's the case, fixed rate mortgages are going to be better for you. Fixed Rate borrowing is going to be better for you. If you're somebody that can handle that kind of see soaring movement of what it's going to cost you every month. You know, on a bad month it's going to go up, but on a good month it's going to come down. Well, in that case, you might be okay to go for a variable rate borrowing, but you've got to decide what that looks like right now, if you're someone who runs a business, interest rates will definitely impact you as well, because quite often borrowing money in a business is like, like filling up your petrol tank in a car. Actually, when, when you, when you need money in a business, the only way to get it quickly is to borrow it. So what we're going to do is have an influx of cash. We fill up that petrol tank, right? But if borrowing rates go up, it's going to deplete our fuel quicker. It's going to deplete our amounts of money that we've got quicker. If rates go down, it allows that money to tick along for longer. Does that make sense? So when the Bank of England base rate changes, it directly impacts the costs of running businesses. It impacts the cost of buying products services. It impacts the cost of, you know, even creating the products and services that we've got our supply chain, everything. A lot of times, people say to me, I don't really think that the Bank of England base rate impacts me because I haven't got a mortgage, I don't own a house, I don't borrow money. I haven't got a credit card, but it does impact you regardless. So it's like the weather forecast, right? You kind of, I don't know about you, I don't look at the weather every day, but I try to be a little bit aware of it, to know whether or not I'm going to pick to wear flip flops or trainers, right? The Bank of England base rate is similar, and I treat you want to treat it similarly. You want to kind of be aware of it. You don't necessarily need to obsess about it. You don't need to be concerned about it. It is what it is, but having an awareness of how it impacts you is quite an important part of getting your money and your finances where you want them to be, certainly for what you're wanting to start doing is investing and moving things forward. Clearing your debt is a big part of becoming a successful money mechanic. If we know our interest rates properly and we understand how to target them best and how we can leverage that in a good way, in a positive way, then we're going to be able to be financially free much quicker. So that's been the episode on the interest rates and a little bit into mortgages, the difference between variable and fixed. If you've got any questions on any of this, please make sure you drop in the comments or drop me a message on any of the platforms I'm around. I'd love to talk to you about it. If you're on YouTube and you're watching, please make sure you subscribe to the channel, hit a like, give us a little comment to let us know how you found this episode. And if you're listening in audio, only make sure you leave me a five star review so that we can help spread the word of Money Mechanics, I've been Sarah Poynton, thanks for listening to the Money Mechanics podcast.

Unknown Speaker 13:47
You.

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