How do rising interest rates affect mortgage repayments?

 Couple seeking mortgage payment holiday advice from their mortgage lender

In December 2021, the Bank of England (BoE) base rate was just 0.1%. As of 9th October 2023, the BoE’s Monetary Policy Committee (MPC) announced rates would remain at 5.25%. That’s the highest level in 15 years. Here’s what it means to you.

Why has the base rate risen?

The rate increases can be partly attributed to the war between Russia and Ukraine, which pushed up fossil fuel prices and led to inflation. The pandemic’s economic effects are also still being felt in 2023, even though life has more or less gotten back to normal.
Changing interest rates is one tool the Bank of England has at its disposal to keep inflation where it wants it, which is around 2%. However, as of September 2023 the rate is 6.3%.

What does a rise in interest rates mean?

As a consumer, rising interest rates can be good news or bad news, depending on whether you’re a saver or a borrower. If you’re saving, it could mean that you earn more interest on your pot. However, not all accounts have interest rates tied to BoE rates. If you’re a borrower, you could well see your monthly payments increase. That includes people with tracker mortgages, credit cards or loans. With regard to mortgages, it all depends on what type of mortgage deal you signed up for.

Fixed rate mortgages

If you have a fixed rate mortgage, your monthly payments will stay the same as they were, at least for now. On your contract, you’ll be told how long your fixed mortgage rate period lasts. Typically, you’ll have a deal that gives you a two to five years fixed rate. After that, your deal will revert to the lender’s variable rate, which will be based on the BoE base rate. When the fixed term ends, your mortgage payments could go up considerably, especially if you started your fixed mortgage rate before December 2021. That’s when lenders were offering very competitive fixed rates. You should be able to find a new fixed rate deal, though, even if that’s with another lender.

Tracker mortgages

If you have a tracker mortgage, your agreement is that your rate will be the BoE base rate plus a certain percentage. If your deal is BoE base rate +2%, your rate as of 9th October 23 will be 7.25%. Tracker mortgages can seem like a more attractive option as they are usually cheaper than a fixed-rate mortgage at the time. They can also go up when the BoE increases the base rate so it’s worth keeping that in mind when deciding to go for a tracker mortgage. Right now, for instance, they are higher due to a series of BoE base rate rises. You can find more information on the various types of mortgages in our article about how mortgage repayments work.

When will interest rates rise again?

Making interest rate predictions is very difficult, as it depends on a mixture of factors, including:

  • Inflation goals set by the Prime Minister or Chancellor
  • Economic growth and expected inflation rates
  • Things outside governments’ direct control, such as environmental change, pandemics, and foreign wars
Even the nine members of the MPC sometimes disagree about whether, or when, interest rates should change. That shows how difficult it is for banks, businesses, and individuals to say if and when interest rates will rise.

How high will UK interest rates go?

There’s no way we can say how high interest rates will go. Economic experts can take a guess based on how close the nation is to achieving its 2% inflation goal. 

If inflation keeps rising, it’s likely that interest rates will keep rising too. 

What happens if interest rates rise?

When interest rates rise, people who are on tracker mortgages or the lender’s variable rate will see increases in their monthly repayments. 

General consumer loans tend to have a fixed rate for the duration of the repayment period, so they should see no change. Credit card interest rates will probably go up too, which will mean increased monthly payments if you usually pay the minimum.

On the plus side, savers could end up earning more interest. However, banks are usually slower to increase interest payments for savers than they are to impose rate rises on borrowers.

Will UK savings rates go up in 2023?

Savers might see increases in their interest rates in 2023. However, banks don’t generally pass on interest rate benefits to savers until they are confident about the direction of the economy. 

There’s nothing to stop savers looking for better deals and moving their money, though.

Dealing with the effects

If you have a tracker or standard variable rate mortgage, the most important thing to do after an interest rate rise is to calculate mortgage repayment changes. 

Most banks, as well as websites like Money Saving Expert have a calculator. You input how much you have left to pay, how long you have to pay it and what your interest rate is. It will then calculate what your monthly payments will be, as well as the total amount.

Your lender should send you a letter or email informing you of the change, but that might take a few weeks. Now, you can ask yourself whether you can afford the change, given your income and non-essential expenses.

If you think you’ll be fine for now, that’s great. If it’s looking touch and go, it might be worth looking into expenses like gym memberships, streaming TV services, and various direct debits for services. 

These are often paid for and forgotten about, and while a few pounds a month isn’t missed when you’re comfortable, they can mount up when you’re struggling. Otherwise, you might just have to make savings in other ways.

If the rise means your essential expenses exceed your household income, there are still things you can do. 

Phone your mortgage lender and explain your situation, and they will probably be able to help. The most likely outcome will be to extend the period of the mortgage. With longer to pay it off, your monthly payments will drop.

It’s also possible that the deal you are on is more expensive than others that are available, in which case you might be able to swap products. 

Just make sure you understand your early repayment charges, which you’ll have to pay if you’re still in an introductory period.

Losing your home is usually a last resort

With a mortgage, your property is itself the collateral for the loan. The worst case scenario is that you have your home repossessed by the lender. However, it’s worth noting that they really don’t want to do this, and will explore many options with you before that happens.

With inflation touching 9%, there are no indications that interest rates will fall anytime soon. They may well rise again. 

Use your time now to sort out your finances with the assumption that your mortgage will cost even more in a few months. A little financial hygiene never hurts anyway.

Look after your pennies, starting today. If you’re out of an introductory period on your mortgage, shop around for a deal. If rates have indeed peaked, you might be in a position to think about refinancing on a better deal in a year or two.

This article was written on 9 November 2023; all information was correct at the time of writing

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