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The impact of interest rate rises on mortgages

financial planning
5 min
Couple on sofa using laptop

On the 4th of August 2022, the Bank of England (BoE) raised its base rate to 1.75%. The BoE base rate is used to determine interest rates in the UK – put simply, the price banks and lenders pay to borrow money.

Interest rates influence many areas of financial planning, including savings accounts, credit cards, loans and, perhaps most significantly, mortgages.

When the BoE base rate changes, it’s quite common for mortgage rates to go up or down depending on the type of mortgage you have – as we’ll see below.

Always remember your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments.

What is the Bank of England base rate?

As it currently stands, the Bank of England base rate is 1.75%. The last time the BoE base rate reached 1.75% was in 2008, after which it largely remained around the 0.5% mark.

At the beginning of the COVID-19 pandemic in March 2020, the base rate was reduced to 0.1%. It was then raised again in December 2021 (to 0.25%), in February 2022 (to 0.5%), in March 2022 (to 0.75%), in May 2022 (to 1%) and in June 2022 (to 1.25%), before the latest increase in August.

How is the base rate decided?

The base rate is decided by the Monetary Policy Committee (MPC). The MPC meets around eight times a year to discuss changes to base rate, taking into consideration factors such as inflation, economic growth and UK employment rates.

Once the meeting has taken place, each member of the MPC votes on the decision, with the majority determining the outcome.

Why has the base rate increased?

In June 2022, the UK inflation rate reached 9.4% – the highest it’s been for 40 years. The rate of inflation has been steadily increasing in recent months, with figures far surpassing the Bank of England’s 2% target set by the government.

As a result, interest rates are being used as a way to curb this steep rise in inflation – but it is expected to take time to work.

The Bank of England has suggested that inflation will continue to rise throughout 2022, but it should start to come down again in 2023. The BoE has also predicted that inflation will reach the government’s 2% target in around two years, but this all depends on what happens in the economy.

How will interest rate rises affect my mortgage?

The impact an interest rate rise has on your mortgage will depend on what type of mortgage you have, and when your deal comes to an end.

Variable rate mortgages

If you’re on a variable rate mortgage with a lender whose interest rate rises in line with the Bank of England’s base rate, you may find that the cost of your monthly repayments increases.

If you have a tracker mortgage, this will definitely be the case. This is because tracker mortgages “track” an external base rate – usually the Bank of England’s.

Fixed-rate mortgages

If you’re on a fixed-rate mortgage, you won’t see any change until the end of the fixed period, at which point you’ll be switched to your lender’s standard variable rate (SVR) unless you remortgage.

If you’re reaching the end of your fixed-term period, it’s wise to speak to your mortgage provider as early as possible. The sooner you speak to your lender, the more likelihood you have of locking in a fixed rate that may potentially protect you from possible interest rate rises in the future.

To find the best deal for your circumstances, it’s advisable to get in touch with your lender at least six months before your fixed-term period ends.

Your provider will find you the best deal they can, but there may be more competitive products elsewhere. This is why it can also be a good idea to seek independent advice from a Specialist Mortgage Adviser if you're thinking of remortgaging.

How to reduce your mortgage interest rate

Knowing how to reduce your mortgage interest rate in the current climate may feel a little unachievable, but there are a number of things you can consider.

  • Assess your loan-to-value (LTV) – If you’ve been paying off your mortgage throughout a fixed-rate period, your LTV bracket may have changed. For example, if your LTV started as 90%, but is now 80%, the interest rate on your new mortgage may be more favourable. You can also decrease your loan-to-value ratio by making overpayments on your mortgage, but it’s wise to speak to your lender to discuss your options.
  • Find the best deal for you – A mortgage is one of the biggest financial commitments you’ll make in life, so it’s important to find the best deal available to you. This is where a specialist mortgage broker can help. When choosing a broker, be sure to find one that has access to the best rates and deals from a range of specialist lenders.
  • Get the support you need – If you’re worried about how interest rate rises are going to impact your mortgage plans, speak to a Specialist Financial Adviser from Wesleyan Financial Services for expert guidance tailored to you.
Sjaene Higgins at Wesleyan
Sjaene Higgins

Mortgage Operations Manager

Sjaene Higgins joined Wesleyan in 2020, having worked in financial services for over 20 years. Holding a variety of roles during this time, Sjaene brings with her a wealth of knowledge, specialising in the mortgage market. She currently leads Wesleyan’s team of in-house mortgage experts, who are responsible for providing specialist mortgage advice nationally for all of our customers.

Sjaene Higgins joined Wesleyan in 2020, having worked in financial services for over 20 years. Holding a variety of roles during this time, Sjaene brings with her a wealth of knowledge, specialising in the mortgage market. She currently leads Wesleyan’s team of in-house mortgage experts, who are responsible for providing specialist mortgage advice nationally for all of our customers.

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