Q. If a 4% mortgage goes up by 0.25%, what's the new rate?
Did you answer 4.25%? If so you’ve have fallen into a trap many newspapers, TV and radio programmes do (and occasionally us here on MSE, too). It’s all about the difference between a percentage increase and a percentage point increase.
Recently I was explaining this to some of the more recent MSE team recruits, and thought it would be useful to set it out here too.
The easiest way to explain this is with an example…
Q. If a 4% mortgage goes up by 0.25 percent what’s the new rate?
A. 4.01%
Q. If a 4% mortgage goes up 0.25 percentage points what’s the new rate?
A. 4.25%
With a percentage increase you take the original value and boost it by 0.25% of what you started with (on a calculator you multiply by 0.0025 to get the amount you’d add).
When the term percentage point is used, it indicates a rise in the number of percents, rather than a multiplication, so here you add 0.25% to the original starting value to get 4.25%.
The difference is crucial
I was sent a relatively trivial press release recently on a survey which talked about a 20% increase on a 30% rate. When reading I decided it wasn’t worth us covering as the change in rate to 36% was not hugely significant.
Actually it later turned out what the company had meant was a rise to 50% (in other words, a 20 percentage point rise, which is a 67% rise). Had I known that I may have been more inclined to send it to the team to suggest we cover the story. The inaccurate communication by the PR lost them the chance of coverage.
