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What do UK interest rate rises mean for you?

The Bank of England has held the UK’s base interest rate at a fifteen-year high of 5.25% since August 2023. We explore the major implications this has for your money, affecting everything from savings to mortgages, plus what you can do now to prepare for the next change.

Between December 2021 and August 2023, the bank’s rate-setting Monetary Policy Committee (MPC) hiked rates 14 times – from an all-time low of 0.1% to today’s level of 5.25%. However, since then, the MPC has voted to keep the base rate unchanged.

The goal with last year’s base rate hikes was to tame the rampant cost of living, which hit 11.1% in October 2022. But with inflation much lower now than it was then, is it now time for interest rates to follow? And what will that mean for your money?

In this article, we cover:

Read more: Will UK mortgage rates go down in 2024?

How does raising interest rates help combat inflation?

Raising interest rates is traditionally seen as a way to bring inflation down. Making it more expensive to borrow money – for people and businesses – means there is less money to spend elsewhere. That should limit price rises.

It also makes it harder to expand or start a business, and could possibly see existing business forced to make cutbacks or even go bust. This means more people available to work and less pressure on companies to raise wages.

Lower wage rises also means people have less money to spend on goods and therefore more pressure on companies to keep prices down.

The two problems with that theory are that, firstly, it takes as long a 18 months for an interest rate rise to filter through to the economy. Secondly, none of this helps prevent price rises driven by international energy price rises or supply shortages caused by Covid, adverse weather hurting crop yields, tankers getting stuck in the Suez Canal or attacks on oil tankers in the Red Sea.

That said, doing nothing at all while inflation remains high risks turning externally driven price rises into wage rises – which could keep prices rises long after the external factors have abated.

Find out more about how interest rates affect inflation here.

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How will my mortgage be affected by higher interest rates?

According to the government’s English Housing Survey around a third of households have a mortgage. How you will be affected depends on the type of home loan that you have.

If you’re on a tracker or variable mortgage, your payments go up almost immediately in response to a base rate hike. The reverse is true when rates start to fall.

That’s because these products generally move in line with the Bank of England, so when it rises, your payments rise, and when it falls, your bills fall, too.

With 639,000 properties on tracker mortgages and 773,000 on standard variable rates, one in four mortgage customers saw their mortgage payments rise every six weeks from December 2021 until August 2023.

After a base rate change, your lender will write to you and let you know how you will be affected.

Your mortgage contract should explain how quickly these changes should take effect.

How much will my variable mortgage go up by?

Last August’s increase in the Bank rate from 5% to 5.25% meant that those on a standard variable rate mortgage faced paying about £33 more a month if borrowing £200,000 over 25 years.

Read more: Should I get a two-year or five-year fixed rate mortgage?

I’m on a fixed mortgage, what does the base rate rise mean for me?

If you have a fixed deal, you are shielded for now. However, when your deal ends, you will likely find yourself paying significantly more than you were in previous years.

There are six million households on fixed-rate mortgages in the UK. Around 800,000 of those deals will end this year, as the two-year anniversary of the stamp duty approaches – leading to serious increases in homeowners’ bills.

See our article on what’s happening to mortgage rates for more.

So should I remortgage now?

If your mortgage is approaching expiry and you want to fix, you can do so up to six months in advance.

All major lenders allow this, including NatWest, Nationwide and Barclays. This starts from the date of offer issue (after underwriting).

The better news is you can lock in a rate today, and – if interest rates fall between now and when you’re due to switch – change to a new deal later on.

Doing a product transfer with the same lender, rather than a full remortgage with a new lender, can save some time, and often doesn’t come with fees.

Another different is that you generally avoid a new affordability assessment by sticking with the same lender. While this might help streamline the process, you need to make sure you can afford the new rate offered.

But you can’t be sure you’re getting the best interest rate on the market – so shop around. See our guide on remortgaging.

If you are wondering whether to opt for a two of five year fixed rate mortgage, we weigh up the pros and cons of each.

Alternatively, you could consider a tracker mortgage. These track the base rate plus around 1 percentage point. Some homeowners are considering trackers while they wait for rates to fall.

Read more: Help! Our cheap five year fixed-rate mortgage is coming to an end

Some tips to consider for remortgaging:

  • Consult a broker: rates are changing quickly right now. Often, mortgage brokers will get a heads-up when a deal is about to be pulled, so it’s worth speaking to one.
  • Charges and fees: watch out for early repayment charges or exit penalties if you are considering switching before your current deal ends. Other costs include arrangement fees, valuation charges and the cost of a solicitor. It could still work out cheaper in the long run for you to pay the fees and charges, but make sure you crunch the numbers.
  • Use a mortgage calculator: choosing the deal with the lowest interest rate can save you a lot of money in repayments. Use this mortgage calculator and remember to factor in any fees and charges.
  • Benchmark the best deal for you: Shop around for the best deal on the market. We have a free mortgage comparison tool that can help you benchmark the best deals for you.

How interest rate rises affect savings

In theory, higher base rate mean higher interest on savings accounts. But many banks have been slow to pass on the rises to savers, and cut rates before the Bank of England too.

Savings rates have risen substantially from December 2021, and you can now earn higher interest than the inflation rate. This means you can gain value on your savings in real terms.

We have a rundown of the top interest rates on savings accounts here.

If you do have money put aside, it may be worth considering using it to pay off debts. Interest rates for borrowing are much higher than on savings deals and some loans are about to get more expensive.

Alternatively, with mortgage rates high, you could use savings to make a mortgage overpayment, meaning you will pay less interest over time.

Remember, you have a personal savings allowance on non-ISA accounts so it might be worth looking at cash ISAs.

Investing can generate higher returns over long periods, but this comes with risk.

Read more: How to invest to beat inflation

What about the effect of the base rate on loans, debt and credit cards?

The rates on personal loans and credit cards rose last year in response to the moves from the Bank of England.

If you have a personal loan already, most are taken on fixed rates so you should not see a change in your monthly payments in response to a base rate rise.

If you have a credit card, rates are variable but not typically explicitly linked to the base rate. This means they won’t necessarily go up immediately.

But if you’re taking out a new loan, credit card or overdraft after a rate increase, it’s likely that you will face a higher rate than a few years ago.

The cost of credit card borrowing was 17.86% in December 2022, now the average rate has surpassed 23% – the highest in 30 years – according to UK Finance data.

Are pensioners affected by high base rates?

If you have a private pension and want to buy an annuity to provide an income in retirement you could benefit from a base rate increase.

Annuity providers invest in government bonds. These bonds are expensive when interest rates are low as other investors want to hold them.

When rates rise, these investors are inclined to sell the bonds, which typically makes them cheaper.

As a result, annuity providers are now able to offer better returns when rates are high

The state pension is not linked to the base rate and is therefore unaffected.

People with defined benefit pensions – where the payout is based on your salary – might see changes too. That’s because in times where rates are higher, it can be cheaper to increase your contribution levels.

Read more: Is pausing your workplace pension ever a good idea?

How do interest rates impact the UK housing market?

Employment rates, how much people are earning, the cost of borrowing, the number of properties on the market and the willingness to lend are the main factors that affect house prices.

Generally, when the economy is doing well, people are in work, job security is stable and wages are higher. When interest rates are low, people are also able to borrow more money to fund a purchase. Providing banks are willing to lend, more people will buy.

Right now, we’re in a market where mortgage rates have shot up, compared to record lows in December 2021. The cost of living crisis is also chipping away at the amount people can afford to borrow and how much they are able to save for a deposit.

The interest rate has a key part to play in this:

  • The lower interest rates are, the lower the cost of borrowing. This means more people will be able to take out a larger mortgage, fuelling more buyers
  • The higher the rates, the more expensive it will be to borrow and therefore fewer people will be able to afford to buy. It also means there are likely to be more repossessions – adding more properties to the market

So if the base rate goes up again, will the property market crash?

Some analysts expect the housing market to slow down this year due to people being able to borrow less.

However, it’s important to note that people who have paid off their mortgage, or are buying a home with cash, will not be affected by higher mortgage rates.

For tenants, figures show the cost of living is fuelling rent increases, especially in major cities. The ONS has said rent rises are at record highs – reducing the ability of renters to save for a deposit.

Read more: How to rent guide: 13 tips for finding a home

How is the Bank of England base rate set?

The Bank’s Monetary Policy Committee (MPC) meets to discuss and set UK interest rates eight times a year. This happens roughly once every six weeks, with announcements being made on a Thursday.

In these meetings, the nine members of the MPC, including governor Andrew Bailey, vote on whether rates should change based on what’s most likely to see inflation be at 2% in the medium term.

When is the next interest rate decision? 

The Bank of England will next meet to vote on 20 June 2024.

Read more: When will interest rates go down?

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