A base rate is the lowest possible interest rate for loans and lending. These rates are unavailable to the public no matter how high an individual’s credit score is. The base rate is instead a rate at which different banks lend funds to each other. Individual clients tend to pay a few more percent on top of a base rate when applying for a personal loan or mortgage loan.
Base rates and benchmarks are generally dictated by the central banks.
There are several different benchmarks that are used for a base rate. The best known was the LIBOR or London Inter-Bank Offered Rate which was popular for decades amongst banks. Following a rate-fixing scandal in 2012, LIBOR started phasing out of use across the globe. It is being replaced by several different benchmarks used as a base rate for lending and mortgages.
Other commonly used benchmarks used for base rates include SOFR, SONIA, and Ameribor. SOFR is set to become the standard in the United Kingdom and stands for Secure Overnight Financing Rate. Ameribor as the name suggests is more common with banks in the United States. Last but not least is SONIA or the Sterling Overnight Interbank Rate.
Individual consumers pay an additional percentage in addition to a base rate regardless of the benchmark chosen when applying for a mortgage or loan. This is typically decided by the clients’ credit score, history, and debt to income ratio. The better the client’s credit score, the better rate they will usually receive for their loan or mortgage.