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How changing mortgage interest rates affect your expenses

Jonathan Leggett
Written by  Jonathan Leggett
Kim Staples
Reviewed by  Kim Staples
5 min read
Updated: 17 May 2024

What will rising interest rates mean for your mortgage and how can you protect yourself from increased costs? Our guide explains how interest rates work and what it means for you

LAST BANK OF ENGLAND UPDATE: The Bank Rate in May 2024 is 5.25%, after the Bank of England once again voted to maintain rates at their current level.

What is happening with interest rates in 2024?

It is the role of the Bank of England to set the benchmark interest rate in the UK, which is known as the 'Bank Rate' or sometimes the 'base rate'. It’s one of the tools used to try to control inflation and exert influence on the economy. 

Any movement in the Bank Rate has an impact on the interest we earn on our savings. It affects the rate at which we can borrow on mortgages too, as well as other forms of credit, such as credit cards and loans. 

For more than a decade, the Bank of England base rate was historically low, meaning people enjoyed low borrowing costs.

In 2009, interest rates were cut to just 0.5% in reaction to the fallout of the financial crisis. They then remained low and reached a record low of 0.1% between March 2020 and December 2021 (to help the economy during the coronavirus pandemic). 

But the outlook has since changed dramatically.

More recently, the Bank of England pushed up the Bank Rate in a bid to curb runaway inflation that's been fuelled by energy shortages.

The Bank Rate rose in December 2021 and then again in February 2022, March 2022, May 2022, August 2022, September 2022, November 2022, December 2022, February 2023, March 2023, May 2023, June 2023 and August 2023.

In September 2023, the long run of consecutive hikes came to an end when the Bank's Monetary Policy Committee (MPC) opted to keep rates at 5.25%. As of May 2024, the base rate remains at this level.

The consensus among most economists is that with inflation showing signs of tapering, we could now start to see the base rate drop in the next few months.

However, inflation remains some way off the government's target of 2%. So we should probably expect any cuts to be gradual and come in 0.25% increments.

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What's likely to happen to interest rates in future?

With inflation falling to more reasonable levels, it's now widely thought that the Bank of England will be looking to trim the base rate when this is viable.

Recent forecasts suggest that we could get four quarter-point cuts to interest rates, with the first deemed likely to come in summer 2024. Thereafter, it's predicted in some quarters that we could see the base rate drop to 4.25% by the end of 2024.

If you're worried about defaulting on your home loan, it's vital you get in touch with your lender who may be able to arrange a payment holiday, allow you to switch to an interest-only mortgage, or extend your term to make repayments more manageable.

Find out more about what you can do if you're struggling with mortgage repayments in our simple guide.

What is an interest rate?

The interest rate set by the Bank of England (Bank Rate) is what other banks and building societies use to set their own lending (and savings) rates for customers. Interest is applied on products such as mortgages and loans - and this is sometimes referred to as the cost of borrowing.

The way mortgage interest works on your home loan will depend on the types of mortgage deal you have - for example a fixed rate or variable rate.

What is the Bank of England Bank Rate?

The Bank of England Bank Rate is controlled by the Monetary Policy Committee (MPC), an independent group of economists working within the Bank of England. 

It is their job to look at how the economy is performing and the level of inflation to decide on the base rate each month. This decision dictates the level of interest set by other banks and building societies in the UK and will impact how much interest you pay on your mortgage or loans.  

If the Bank of England decides to put up the Bank Rate, the aim is to get banks and lenders to also increase the rates they charge to borrowers and businesses. This includes the interest rate they charge on mortgages. 

Why did interest rates rise?

The Bank of England's spate of rate hikes over the last few years and subsequent freezes to the base rate are intended to curb soaring inflation, which is being driven largely by the sky-high price of energy.

In more normal circumstances, a central bank's usual motive for keeping rates high is usually to ensure consumers getting a better return on money they have squirrelled away.

This, in turn, should motivate them to save, rather than spend their money.

Higher rates should also encourage Britons to borrow less because loans (including mortgages) and credit are more expensive. This should also help to slow the rise in the cost of everyday goods.

How do interest rates affect my mortgage?

If interest rates rise, mortgages will become more expensive. Lenders will typically pass on the increase in the Bank Rate to their customers in the form of higher monthly mortgage payments.

This will cost you more over the term of your mortgage. 

Conversely, if, as now seems likely, the base rate begins to fall we could see mortgages become more affordable in the medium term.

If you are about to buy a home or remortgage, you might want to think about opting for a fixed-rate deal. This way, you’ll lock into a lower rate for the next few years and shield yourself from rising rates. 

How would rising interest rates affect my mortgage?

If you’re on a tracker mortgage – a product which tracks the Bank of England’s Bank Rate – your mortgage rate will always increase or decrease in line with any rise in the base rate. 

If you are on a variable mortgage deal, such as a discounted variable rate or standard variable rate, the rate may be influenced by a rise in the Bank of England Bank Rate. But bear mind that this is at the lender’s discretion.

In some cases, for instance, a lender may pass on a bigger rate increase to its variable mortgage rates. Alternatively, the rate increase could be less than the change to the Bank Rate. 

What will happen to my mortgage payments in 2024?

If you’re on a fixed-rate mortgage deal, you won’t see any change in your rate or monthly payments until your plan ends.

This is because you’ve agreed to your rate for a set period of time. But once this fixed-rate deal finishes, you could find that the rates of new fixed-rate plans are much higher than when you last fixed them. 

If you’re on a tracker mortgage linked to the Bank Rate, your repayments will rise with any increase to the Bank of England rate. So, it’s possible that your rate and payments will increase even further this year. 

As a borrower, you need to be aware that even a small increase in the Bank Rate can translate into a significant increase in your monthly mortgage costs. 

For guidance, if the Bank of England puts interest rates up by 0.5%, that would add £56 a month to a 25-year £200,000 mortgage for those on a tracker mortgage deal. Over a year, this would add up to £672. 

The table below reveals how much incremental increases to a tracker mortgage rate can add to an average borrower’s monthly mortgage repayments. This is based on a £150,000 repayment mortgage over 25 years.

Mortgage rate

Monthly repayment

1.5%

£600

2%

£636

2.5%

£673

3%

£711

3.5%

£751

4%

£791

4.5%

£833

5%

£877

5.5%

£921

6%

£967

6.5%

£1.013

How can I protect myself from rising interest rates?

If you’re on a variable-rate mortgage, the best way to protect yourself from rising rates is by moving to a fixed rate. In many cases, this is likely to be the sensible option as you can lock into a lower rate for two, three or even five years. You can simply choose the right plan for your needs.

Typically the best fixed-rate deals are quickly withdrawn by lenders if there is the hint of an interest rate rise. And for that reason, you'll usually need to act fast. But always tread carefully before making any move to check what fees might apply. 

While you shouldn’t face early redemption penalties for leaving a standard variable-rate mortgage, there could be an arrangement fee when moving to a new fixed-rate deal. Also remember to factor in expenses such as valuation and conveyancing fees.

If you are currently on a fixed rate, it pays to be prepared. If you’ve got less than six months to run, you can secure a new mortgage deal now in advance. Don’t wait for your deal to expire. 

When choosing a new fixed rate mortgage, you might want to consider a longer-term fix of five or even ten years, for example.

But beware of fixing for longer than you are comfortable with. It’s hard to predict what life will look like a decade from now and there might be early-exit penalties if you want to move house or restructure your loan within the fixed rate term. 

Where can I get the best and cheapest interest rate for my mortgage?

There is no single ‘best’ mortgage deal at any point in time. The best rate you can get will depend on your financial circumstances and the mortgage rates available at the time. The Bank of England Bank Rate will have a big impact on this. 

That said, lenders may choose to offer low rates from time to time in a bid to win new business. That’s why it’s so important to research carefully by shopping around to compare mortgages both on rates and fees. This gives you the best chance of finding the most suitable product for your needs. 

Can lenders withdraw a mortgage offer? 

Unfortunately, the answer is yes. Given the rise in interest rates and the uncertain economic situation, some lenders have taken the decision to pull their mortgage offers from the market. 

This can happen at any time, even after contracts have been exchanged and completed. In this scenario, you’ll need to source another suitable deal and restart your mortgage application process from the outset.  

This might include affordability and eligibility checks, such as reviews of your history and credit score, which will allow lenders to pinpoint a new mortgage offer. Bear in mind that the new offer may come with a different interest rate. 

With MoneySuperMarket, you can browse an array of mortgage options and choose the one that best suits your needs and pockets. 

How can I keep my mortgage costs down?

There are several steps you can take to keep your mortgage costs as low and affordable as possible.  

If you’re a first-time buyer, one of the best things to do is save up as much towards your cash deposit as possible. This will mean you need to borrow less on a mortgage and you’ll have a lower loan-to-value ratio (LTV). With a lower LTV, you’ll be able to access more competitive interest rates.  

If you’re remortgaging (switching to a new mortgage deal) and now have a lower LTV than previously, this should also mean you can access better rates than before.  

If you’re worried about rising interest rates and you’re on a variable rate, it could make sense to switch to a fixed rate. This can give you peace of mind that your monthly repayments won’t keep going up even when the Bank Rate rises. 

If you are currently on a fixed-rate deal, you may be able to save by switching to another fixed rate, depending on what rate you’re paying now. But don’t rush into any decision before checking if you’ll face early repayment fees on your current deal. 

If you’re seriously concerned about your mortgage costs, speak to your lender as soon as possible. It should help you find a way to make your repayments manageable.

This could be either through restructuring the debt (increasing the term to bring down monthly repayments for example) or, if appropriate, with a short-term payment holiday. 

Should I remortgage now? 

There is no hiding that this is a tricky decision, especially in the current climate. 

With the general consensus that rates are likely to drop significantly over the next 12 months, if you fix now you could lock into a deal that's more expensive than those that are expected to come to market in the medium term.

Conversely, if you decide to opt for a new fixed-term mortgage contract, you’ll have the certainty that you’re paying a set sum every month with no surprises. 

Something else you may want to take into consideration is whether your current plan comes with an early repayment charge.

If that’s the case, it might be worth waiting until the end of your fixed-term plan. This is true if the early repayment charge is particularly high.  

Not only that, but you’ll also need to factor in any potential sign-up fee, which you’ll need to pay to secure and confirm your new deal. 

So, what should you do? Ultimately, the choice is yours. But MoneySuperMarket is here to guide you every step of the way and help you identify the mortgage deal that best works for you. 

Our other helpful mortgage guides

Check out our other guides for more information on mortgages:

Should I fix my mortgage or go variable? | MoneySuperMarket

Understanding a Mortgage Offer | MoneySuperMarket

Joint Mortgage paid by one person | MoneySuperMarket

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