What do UK interest rate rises mean for you?

The Bank of England has hiked interest rates for the 12th time in a row, raising them to the highest level in 15 years.

Despite falling back slightly in March, inflation remains stubbornly high at 10.1%. The base interest rate has risen from 0.1% in December 2021 to its current level of 4.5% in order to tackle the rising cost of living.

Almost two million mortgage holders on tracker rates take an immediate hit when the base rate goes up. On the plus side, savings rates tend to rise too.

In this article, we explain:

• How does raising interest rates help inflation? 
• What does the interest rate rise mean for mortgage repayments?
• What does the interest rate rise means for savings?
• The effect on loans, debt and credit cards
• What does an interest rate rise means for pensions?
• How do interest rates impact the UK housing market?

How does raising interest rates help combat inflation?

Inflation – a measure of the cost of living – is at 10.1%. The Bank of England has been raising rates in an attempt to bring it back down to its 2% target. It does this by making borrowing more expensive.

In theory, this puts people off spending and encourages them to save instead. With less demand for goods and services, prices should fall and inflation should start to go down.

The Bank has hiked rates 12 times since December 2021, when the cost of borrowing stood at 0.1%, to its current level of 4.5%.

It worked to an extent. Inflation has fallen three times in a row in recent months, but then in February it rose back up to 10.4%. In March, it dropped back down to 10.1%.

Economists have predicted the base rate could keep rising, peaking at 5% this year.

The Bank of England also warned that the UK could be on course for its longest recession since reliable records began a century ago. The longest recession, in 2008, lasted for 18 months (or five consecutive quarters).

However, in his budget, chancellor Jeremy Hunt said the UK would avoid a technical recession – defined as two consecutive quarters of declining GDP – this year.

Financial markets are also in turmoil. The European Central Bank raised its three main interest rates by 50 basis points in March amid market crisis at Credit Suisse and the collapse of Silicon Valley Bank.

Read more about how increasing interest rates helps reduce inflation.

How do interest rate rises affect mortgages?

If you’re on a tracker, standard variable rate (SVR) or variable mortgage, your payments will rise almost immediately in response to the latest base rate hike.

These products move in line with the Bank of England, so when it rises, your payments rise, and when it falls, your bills fall, too.

With 850,000 properties on tracker mortgages and 1.1 million on standard variable rates, one in four mortgage customers have seen their mortgage payments rise every six weeks since December 2021.

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.

See five things to do now if your mortgage deal is ending this year.

How much will my variable mortgage go up by?

An increase in the bank rate from 4.25% to 4.5% means that those on a typical tracker mortgage would pay about £24 more a month. Those on standard variable rate mortgages would face a £15 jump.

This would come on top of increases following the previous recent rate rises. Compared with pre-December 2021, average tracker mortgage customers would be paying about £418 more a month, and variable mortgage holders about £266 more.

The average standard variable rate (SVR) is now above 7%, a level not breached since 2008. A rate rise of 0.25% on the current average SVR of 7.12% would add approximately £772 onto total repayments over two years. Homeowners may want to consider fixing instead.

Read more: Is my mortgage about to get more expensive because of interest rates?

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 it ends, you will likely find yourself paying significantly more.

Two and five year deals are now averaging at 5.32% and 5% respectively. This compares to 1% to 2% a little over a year ago. 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.

The providers that allow this include Natwest, Nationwide and Barclays. This starts from the date of offer issue (after underwriting).

There are a few exceptions. Halifax and Santander issue offers that are valid for as little as 14 days, but can go up to six months. These have standardised offer validity lengths based on dates of mortgage deal issue, rather than mortgage offer date.

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. 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 locked in a deal in advance, you may be able to switch it if rates have fallen – see what to do if you want to cancel your fixed-rate mortgage deal.

If you’re exiting your deal early, make sure the savings outweigh any fees you may have to pay.

Some tips to consider for remortgaging:

• Move quickly: the top rates are disappearing fast due to the current high demand, so you’ll have to act fast.
• 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: remortgaging to a lower interest rate can save you a lot of money. 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.
• Get help: You can also get advice from a mortgage broker – they will have access to some deals that are only available via brokers.

Read more: I locked in a mortgage at 6% in advance, am I now locked in or can I move to a cheaper one?

How interest rate rises affect savings

In theory, a rate rise should lead to higher interest on savings accounts.

But many banks have been slow to pass on the last ten base rate rises to savers.

Moneyfacts figures show the majority of the biggest high street banks have failed to pass every Bank of England base rate rise to easy access accounts.

But even if they did, the average savings rate still remains well below inflation at 10.1%. That means if your bank passed on the full amount, you would still find your money losing value in real terms.

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.

If you are relying on savings to fund future purchases or for emergencies, don’t assume the rise in the bank’s best rate will automatically mean the interest on your account will go up.

Rachel Springall, finance Expert at Moneyfactscompare.co.uk, said for those looking for savings accounts, cash ISAs may be your best bet.

“Not every savings provider will pass on a base rate rise, so it’s crucial for savers to ditch and switch if they find a better return elsewhere,” Springall explains.

“If savers are comparing their easy access savings accounts, they will find challenger banks and building societies are offering some of the best returns, but the majority of the biggest high street brands pay less than 1%.

“Providers are continuing to improve their cash ISAs, including easy-access ISAs, so it’s worthwhile for savers to consider using their ISA allowance before the current tax year ends.”

Remember, you have a personal savings allowance on non-ISA accounts.

Investing can generate higher returns over long periods, but this comes with risk. See our guide on how to invest for more information.

Read more: How to recession-proof your money

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

Most personal loans are taken on fixed rates, so if you have unsecured borrowing you should not see a change in your monthly payments in response to a base rate rise.

Credit card rates are variable, but not typically explicitly linked to the base rate, so they won’t necessarily go up immediately.

But if you’re taking out a new loan after a rate increase, it’s likely that you will face a higher advertised rate.

Are pensioners affected by the base rate rise?

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 and these 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.

Annuity rates had already been rising last year, and another base rate increase could help those who are about to retire.

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

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 cheaply and providing banks are willing to lend, more people will buy.

Right now, we’re in a market where mortgages have shot up, compared to a record low in December 2021. The cost of living crisis is also chipping away at the amount people can afford to borrow.

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 mortgage, fuelling more buyers.
• The higher the rates, the more expensive it will be to borrow and therefore fewer people will be able to buy.

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

UK house prices rose unexpectedly for a third month in a row in March, with the average house costing £287,880, according to the Halifax. Prices have been stable over the last three months following the falls seen in November and December.

But economists across the board forecast a slowdown of up to 20% this year due to people being able to borrow less. Lloyds bank predicts prices will drop and then remain stagnant for four years.

For tenants, figures show the cost of living is fuelling rent increases, especially in major cities. Property portal Rightmove said city rental prices listed by landlords were up 12% last year and tenant demand is high.

It predicts that asking rents across Britain will rise a further 5% through 2023 because of the ongoing imbalance between the number of those looking to rent and the number of rental properties available.

Read about one couple’s experience of how the house they were buying had been overpriced by £40,000.

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.

When is the next interest rate decision? 

The Bank of England will next meet to vote on 22 June 2023.