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No interest in interest

How much - or how little do Brits know about interest rates?

Mortgages, personal loans and savings have one thing in common – an interest rate – making it something which affects almost everyone. But who has an ‘interest in interest’?

The interest rates we earn on our savings and pay on our debts are hugely influenced by the Bank of England base rate. This is one of the key tools the Bank uses to influence the UK economy.

The base rate has never been lower, reaching 0.25% in August 2016. Before that, it sat at 0.5% for over seven years, and we have to go back to July 2007 for the last time there was an increase.

That means someone who is a fresh university graduate would have just started secondary school when the base rate last rose. That was when the final Harry Potter book was published, Steve Jobs announced the first iPhone and Rihanna released Umbrella!

Banks, building societies, credit card companies and other financial firms all take their lead from the base rate. That’s why mortgages and other loans are on offer at historically low rates, and why the returns on savings accounts are so disappointing. It’s also why many people tend to confuse the base rate, set by the Bank of England, with the interest rates set by high street banks, for example. To set aside confusion, any mention of “interest rates” in this article refers to mortgage, savings and other interest rates in general, excluding the base rate.

So how well do British savers and borrowers understand the impact of interest rates on their financial well-being?

To find out, we conducted a survey of the British public to see how financially savvy people are when it comes to interest rates and the base rate. The results were surprising! Nearly three quarters of Brits (70%) either got the current base rate wrong or admitted that they didn’t know what it was.

Not only that, but only one in 100 people knew exactly how an interest rate increase from their bank would affect their monthly mortgage payments.

When asked who in their household is the most knowledgeable about interest rates as a whole, 43% claimed “I am”. Yet of those financial gurus, the majority (63%) got the current base rate wrong or didn’t know!

To make the rest of our findings more approachable, we’ve split them into three sections – age, gender and region.

I’m young, why should I care?

According to the most recent ONS data on the demographics of English homeowners[1], only 9% of the 16-24 age group own a home.

No home means no mortgage, so this goes some way to explain our findings of a distinct generational divide when it comes to being informed about the base rate, and interest rates in general.

However, interest rates still affect young adults in myriad ways, from their student loan to their credit card to their savings, if they’re lucky enough to have any. And, of course, the wider economy and jobs market are shaped to a degree by what happens to interest rates as a whole.[2]

Adults vs Teens

 

 

The key stats show that over four fifths (81%) of 18-24 year olds either got the current base rate of 0.25% wrong (over a quarter believe that it’s currently at 1.25%) or didn’t know anything about it.

Only one in three young adults were able to correctly identify the definition of the wider term “interest rate”. According to the Cambridge Dictionary[3], this is “the interest per cent that a bank or other financial company charges you when you borrow money, or the interest per cent it pays you when you keep money in an account”.

Despite older generations being better informed generally, the majority (57%) still got the base rate incorrect, suggesting better education is needed across all ages.
 

Gender Differences in Understanding Interest Rates

 

Our research indicates differences in interest rate knowledge between men and women. 40% of men correctly selected the current base rate compared to 25% of women, while one in two men knew that interest rate in general was “the percentage rate charged on a loan or paid on savings”, compared to 41% of women.

All this considered, a majority of Brits - regardless of gender - still get the base rate wrong. Women, however, are more willing to admit that they don’t know what it is (31%) compared to men (16%).

When asked how an interest rate increase would affect people’s monthly mortgage payments, both genders answered in similar ways – 40% of both suggested that they didn’t know.

Finally, whereas an overwhelming number of men (69%) claimed they were the most knowledgeable about interest rates in their household, only 29% of women claimed the same thing, with most naming their spouse or partner as their go-to financial expert.
 

Gender attitudes towards loans & finance

If the country as a whole has poor awareness of interest rates, then perhaps we can assume that people in the City of London - the financial capital of the UK - would be leading the way in their understanding of interest rates and base rate.

But that honour in fact goes to the wider South West region, closely followed by the South East and Northern Ireland.

Interest rate comprehension by region

 

When it comes to the region with the lowest comprehension of the base rate, that title falls to the Welsh – with only 14% getting the right figure. The Midlands follows Wales, although not that closely, with a quarter of people knowing the current base rate.

Interest rate comprehension by region

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Sources

To find out more about how much your mortgage payments and savings could be affected by a change in the interest rate, take a look at our handy Base Rate Calculator.

*All data (except where otherwise stated) is based on a MoneySuperMarket survey of 1084 people, between 25th August and 4th September 2017

[1] http://visual.ons.gov.uk/

[2] http://www.economicshelp.org/

[3] http://dictionary.cambridge.org/

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