What implications do increases in UK interest rates hold for you?

Interest rates in the UK are now the highest they’ve been in 15 years. In August, the Bank of England increased the base rate for the 14th time in a row, raising it from 5% to 5.25%.

Glenn Burgess

The central bank is working hard to lower inflation to its 2% target. Even though the headline inflation rate has come down from its highest point last year, the cost of living is still quite high at 6.8%.

The core inflation rate, which doesn’t include things like food and energy that can change a lot, didn’t change in July and remained at 6.9%. This worries decision-makers because it suggests that high prices might stick around for a while.

This increase in the base interest rate affects both people who save money and those who borrow, especially people with mortgages. It’s expected that the interest rate will go up even more and might reach around 5.75% by the end of this year.

In this article, we cover:

How does the increasing interest rates assist in the fight against inflation?

CPI inflation, which tells us how much it costs to live, went down more than expected. In July, it was 6.8%, down from 7.9% in June (the latest numbers).

To try and make inflation go back to its 2% target, the Bank of England has been increasing the base interest rate. The idea is that if borrowing money becomes more expensive, people might not want to spend as much and might choose to save instead.

When there’s less demand for stuff, like goods and services, their prices can go down, and that helps bring down inflation.

Since December 2021, the Bank has raised interest rates 14 times. Back then, the cost of borrowing was super low at 0.1%, but now it’s at 5.25%. They’re thinking it might go up to 5.75% in the future.

What impact will increasing interest rates have on my mortgage?

According to the English Housing Survey by the government, about a third of households have a mortgage. How rising interest rates affect you depends on the type of mortgage you have.

If you’re on a tracker or variable mortgage, your payments increase almost immediately when the base rate goes up. These mortgages move in sync with the Bank of England, so if it goes up, your payments go up, and if it goes down, your payments decrease.

There are around 639,000 properties with tracker mortgages and 773,000 with standard variable rates. This means one in four mortgage customers has experienced higher mortgage payments every six weeks since December 2021.

When the base rate changes, your lender will send you a letter explaining how it will impact you. Your mortgage contract should also detail how quickly these changes will take effect.

By how much will my variable mortgage increase?

The rise in the Bank rate from 5% to 5.25% will result in an approximately £33 monthly increase for individuals with a standard variable rate mortgage when borrowing £200,000 over 25 years.

The average variable rate, as reported by Moneyfacts, is currently 7.85%. For those with a typical tracker mortgage, where the average rate at the time of the recent increase was 6.52%, they can expect to pay approximately £31 more each month.

I have a fixed-rate mortgage. How does the increase in the base rate affect me?

If you currently have a fixed-rate mortgage, you’re protected from rate increases for now. However, when your fixed term ends, it’s likely that you’ll end up paying much more than you did in previous years.

In the UK, there are six million households with fixed-rate mortgages. Approximately 800,000 of these mortgages will come to an end this year, especially those that were taken out around the time of the stamp duty changes. This could result in significant increases in homeowners’ monthly bills.

To give you an idea, two-year and five-year fixed-rate deals with a 75% loan-to-value ratio are now averaging at 6.75% and 6.23%, respectively, according to Moneyfacts. This is quite a jump compared to just a little over a year ago when rates were around 1% to 2%.

Is it a good idea for me to consider remortgaging at this time?

If your mortgage is nearing its end and you want to secure a new fixed rate, you typically have the option to do so up to six months in advance. Several providers, including NatWest, Nationwide, and Barclays, offer this service.

The countdown starts from the date when your mortgage offer is issued, usually after the underwriting process.Choosing a product transfer with your existing lender, as opposed to a full remortgage with a new one, can save you time and might not involve additional fees.

However, it’s important to note that you may not be guaranteed the best interest rate available, so it’s a good idea to explore other options in the market. You can find more information on remortgaging in our guide.

If you’re unsure whether to go for a two-year or five-year fixed-rate mortgage, it’s helpful to weigh the advantages and disadvantages of each option.

Alternatively, you might want to consider a tracker mortgage. These mortgages follow the base rate plus around 1%. Some homeowners are considering tracker mortgages while they wait to see if interest rates will decrease.

Some tips to consider for remortgaging:

Consult a Mortgage Broker:

Rates are changing quickly right now. Mortgage brokers often get early notice when a deal is about to be withdrawn, so it’s a good idea to talk to one.

Watch out for Charges and Fees:

Be cautious about early repayment charges or exit penalties if you’re thinking of switching before your current deal ends. There are also other costs like arrangement fees, valuation charges, and the fee for a solicitor’s services. It’s possible that paying these fees could still be cost-effective in the long run, but it’s important to do the math.

Use a Mortgage Calculator:

If you’re considering remortgaging to a lower interest rate, it could save you a significant amount of money. You can use a mortgage calculator to figure out the potential savings, and don’t forget to include any fees and charges in your calculations.

Find the Best Deal for You:

Shop around to find the best mortgage deal on the market. We offer a free mortgage comparison tool that can help you find the most suitable deals for your situation.

How do increases in interest rates impact your savings?

In theory, when interest rates go up, you should earn more interest on your savings. However, many banks have been slow to pass on these rate increases to savers.

Even though savings rates have gone up considerably since December 2021, the average savings rate is still lower than the inflation rate, which is at 6.8%. This means that your money is actually losing value in real terms.

If you have some money saved, it might be a good idea to consider using it to pay off any debts you have. The interest rates on loans and credit can be much higher than what you’re earning on your savings, and some loans are getting more expensive.

Another option is to use your savings to make extra payments on your mortgage, especially when mortgage rates are high. This can reduce the amount of interest you pay over time.

Don’t forget that you have a personal savings allowance on non-ISA accounts, so it’s worth exploring cash ISAs, which might offer tax advantages.

While investing can potentially yield higher returns over the long term, it also comes with risks. You can find more information on how to invest in our investment guide.

How does changes in the base interest rate affect loans, debt, and credit cards?

The base interest rate changes have caused rates on personal loans and credit cards to increase.

Personal loan rates have doubled since December 2021. For example, someone with a good credit rating could have secured a best buy rate of 3.3% for a new £5000 loan to be paid back over 36 months. Now, that rate has risen to 6.6%, according to MoneyComms.

If you already have a personal loan, most of them come with fixed rates, so you won’t see an immediate change in your monthly payments when the base rate goes up.

Credit card rates are typically variable and not directly tied to the base rate. This means they may not immediately increase when the base rate rises. However, if you’re applying for a new loan, credit card, or overdraft after a rate increase, you’ll likely face a higher interest rate.

The cost of borrowing through credit cards was 17.86% in December, but now the average rate has exceeded 23%, which is the highest it’s been in 30 years, according to data from UK Finance.

Do changes in the base interest rate impact pensioners?

If you have a private pension and are considering purchasing an annuity to secure retirement income, you might see some benefits from an increase in the base interest rate.

Annuity providers usually invest in government bonds. These bonds become more expensive when interest rates are low because many investors want to hold onto them. However, when interest rates go up, these investors tend to sell the bonds, which typically leads to lower prices.

As a result, annuity providers can offer more attractive returns when interest rates rise.

It’s worth noting that annuity rates had already been increasing in the previous year, and another base rate hike could potentially assist those who are nearing retirement.

However, it’s important to understand that the state pension is not linked to the base rate, so any changes in the base rate don’t directly affect it.

How do changes in interest rates affect the housing market in the UK?

The factors that primarily influence house prices in the UK include employment rates, income levels, borrowing costs, property supply, and lending conditions.

When the economy is thriving, it typically means more people are employed, job security is stronger, and wages tend to be higher. In such favorable economic conditions, people are more inclined to buy homes.

The cost of borrowing, particularly interest rates, also plays a crucial role. Lower interest rates make borrowing money more affordable, which can stimulate demand for homes. However, the willingness of banks and lenders to offer mortgages is equally important. If they are open to lending money at attractive terms, more individuals can enter the housing market.

Currently, we’re witnessing a situation where mortgage rates have risen significantly compared to the record-low rates in December 2021. This increase in borrowing costs, along with the ongoing cost of living crisis, has put pressure on people’s ability to afford new mortgages.

In summary, the housing market is greatly influenced by the overall economic health, interest rates, property supply, and lending practices. When these factors align favorably, it generally results in a robust housing market with increased homebuying activity. Conversely, when there are challenges in any of these areas, it can impact people’s ability to buy homes and, consequently, affect house prices.

Indeed, the interest rate is a critical factor in the housing market:

Lower Interest Rates:
When interest rates are low, borrowing money is more affordable, which encourages more people to take out mortgages. This increased demand for homes can lead to rising house prices.
Higher Interest Rates:
Conversely, when interest rates rise, borrowing becomes more expensive. This can deter potential homebuyers as it becomes more challenging for them to afford mortgages. A higher interest rate can potentially slow down the housing market and even lead to a decrease in property prices.

So, the interest rate acts as a lever that can either stimulate or cool down the housing market, depending on whether it is lowered or raised by the central bank.

How is the Bank of England base rate determined?

The Bank of England’s base interest rate is determined through a process involving the monetary policy committee (MPC). The MPC convenes eight times a year, approximately once every six weeks, with announcements typically made on Thursdays.

During these meetings, the MPC consists of nine members, including the governor, Andrew Bailey. They gather to discuss and vote on whether there should be any changes to the interest rates in the UK.