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Interest Rates

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Many businesses need to borrow money from lenders (banks, building society’s, industry etc) When they borrow money they have to pay it back with interest. The Bank of England set the ‘base’ interest rate. They review this rate at the beginning of every month. Then the lender uses this rate and adds a percentage or two on top to make their profit.

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For Example You borrow £10,000 over 60 months (5years). This would be £166.67. However you have to add interest. The Bank of England set interest rate at 4.75%. Then the lenders adds their bit and the interest on the loan becomes 6%. So you actually pay back £197.83 a month. Total repayment = £11,869.80

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What if the Bank of England changes the rate? If they put it up it means that you have to pay more on your loan repayments and if it goes down you pay less. The loan of £10, 000 over 5 Years 4%£187.18 = £11,230.80 5%£192.47 = £11,548.20 6%£197.83 = £11,869.80 7%£203.24 = £12,194.40

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What a difference ! The difference between the bottom interest rate and the highest interest rate is £963.80 More!

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It works the other way too! If you have savings you get the same interest rate on your savings (depending on the type of account you have). When the interest rate goes up you get more interest on your savings and if it goes down you get less.

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Activity Go onto A.www.bbc.co.uk/homes/property/mortgagecalculator B.Find out how much it would cost to have a loan for the following. (INTERST RATE 5.5%) (draw a table 3 columns, 3 rows for the answers) C.£150,000 over 10 years D.£150, 000 over 20 years E.£150, 00 over 25 years F.Now for each using a calculator work out how much you would repay in total. G.No. of yrs x 12, that answer time the repayment = answer H.E.g 5 year x 12 = 60 60 X £782.12 = £46,927.20

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ANSWERS 10 Years£1658.34£199,000.80 20 Year2£1045.99£251,037.60 25 Years£931.86£279,558.00

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