How Rising Interest Rates Could Affect Your Finances

An interest rate rise is triggered when the Bank of England (BoE) increases its base rate. It means that the bank will charge more interest on the money it lends financial institutions and pay more interest on the money it holds, having an impact on how much your bank, building society or lender charges you to borrow and pays you to save.

Rising interest rates mean you can earn more from your savings, but borrowing becomes more expensive.

In recent years, borrowers and savers have become accustomed to low interest rates. However, on 16 December 2021 the BoE announced an increase to the base rate from a record low of 0.1% to 0.25%. Since that initial rise, the base rate has been pushed up further in an effort to tackle growing inflation, increasing to 0.5% in February 2022. Usually, low interest rates will mean spending increases and inflation rises. By increasing interest rates, the BoE will hope inflation will fall.

What is an interest rate rise?

When interest rates rise, it means the BoE is charging financial institutions more to borrow money and paying them more to save.

The interest rate you are charged by your bank, building society or lender, or earn from your savings provider, is based on the rate those financial institutions will pay or earn from the BoE. This is known as the Bank of England base rate and is decided upon by the bank’s Monetary Policy Committee.

Announcements on whether the rate will rise, fall or stay the same are usually made eight times a year, though more changes can be made in exceptional circumstances.

Your bank or lender is not compelled to immediately raise or decrease the interest rates on its products in line with the base rate, unless it is a product that is specifically designed to do so, such as a tracker mortgage. However, as it affects how much financial institutions are being charged or paid, most will look to pass on the increase, or some of the increase, to customers eventually.

» MORE: Understand How the Bank of England base rate influences your finances

When was the last interest rate increase?

In February 2022, the BoE increased the base rate from 0.25% to 0.5%.

The December 2021 increase was the first rise since August 2018, when the base rate increased from 0.5% to 0.75%. This was maintained until March 2020, when the rate was cut to 0.25% and then to a record low of 0.1% in response to the Covid-19 pandemic. Before then, interest rates had only increased twice since July 2007.

» MORE: Find out more about interest rates

When will interest rates rise?

The short answer is that nobody knows for certain when interest rates will rise next. While some experts have forecast another imminent rise, others disagree.

Any rise will be decided by the Bank of England’s Monetary Policy Committee, who meet eight times a year. They vote on proposals to increase, maintain or decrease the bank rate.

Does higher inflation affect interest rates?

Rises in inflation will usually prompt the BoE to look at increasing interest rates. This is because they are considered to be in an inverse relationship, where if one increases the other decreases.

By increasing interest rates, central banks can try to lower inflation over time and help savings keep up with rising costs.

If inflation grows too high, wages start to decrease in value. This means household incomes and the value of savings begin to go down compared to the cost of living.

The government has currently set the BoE an inflation target of 2%. It believes this is a stable figure that avoids the cost of essential goods rising too high, while still encouraging wage growth.

» MORE: Learn more about the UK inflation rate

What would rising interest rates mean for me?

The impact of rising interest rates on your finances will depend on whether you are a saver, a borrower or both. Rising interest rates make borrowing more expensive, but saving becomes more rewarding.

Mortgages

The effect of rising interest rates on your mortgage will ultimately depend on the type of mortgage that you have.

Tracker mortgages will be the first mortgage products to feel the effect of any changes. For borrowers on variable rate tracker mortgages, your monthly repayments will immediately increase. This is because the amount of interest you are charged on your debt with this type of borrowing varies, depending on the rate set by the BoE.

Repayments on standard variable rate mortgages will also likely become more expensive as interest rates rise. The exact increase will be decided by your lender, rather than a direct rise in line with the base rate.

For example, your lender may choose to increase your rate by 0.5%, from 3% to 3.5%. For someone with a loan value of £250,000 and a mortgage term of 25 years, that would mean your monthly payments would rise from £1,186 to £1,252.

If you have a fixed-rate mortgage, your monthly repayments will not change during your fixed term. So unless you are coming to the end of your term and are looking to remortgage, your repayments will stay the same.

» COMPARE: Mortgage providers

Loans

Taking out a new personal loan after an interest rate rise will usually be more expensive than before. As with mortgages, providers will typically charge higher rates of interest on loans once the base rate rises.

Most unsecured personal loans charge a fixed interest rate, so if you have an existing unsecured personal loan your interest rate should remain unchanged and your payments will not be affected. However, it is possible to have a variable rate secured loan, in which case an increase in the base rate will mean a rise in your monthly repayments and the total amount that you repay over the term of the loan.

» COMPARE: Personal loan providers

Credit cards

The rate of interest on your credit card can increase with rising interest rates, and you may find the cost of alternative credit cards has gone up too.

If your credit card provider increases your interest rate, it will usually need to notify you 30 days in advance. If you are unhappy with the adjusted rate, you have 60 days to pay off and cancel your card without being charged the new rate of interest.

» COMPARE: Credit card deals

Savings

A base rate rise is usually good news for savers, though you could be waiting a while to see the full benefits on your savings. This is because banks and building societies are unlikely to immediately increase interest rates on their savings accounts to match the base rate rise, and they may only pass on some of the increase.

Whether you see any increase at all will also depend on the type of savings product that you have. Fixed-rate savings accounts, such as a fixed-rate bond or a fixed-rate cash ISA, will keep the same interest rate throughout the term of the product. Therefore any change in the base rate will not affect your savings.

How can I prepare for rising interest rates?

It is always important to be on top of your finances, but especially if rising interest rates are on the horizon. Here are some points to consider to protect your finances against rising interest rates.

• If you have a mortgage, check the length of the term and whether it is a variable, tracker or fixed-rate deal. You can then decide if the best option for you is to lock into a new fixed-rate mortgage term as soon as possible, or choose a different option. You can use our mortgage calculator to work out what an interest rate rise would mean for your monthly repayments.
• Keep track of where your savings are located and how much interest they are earning. If you have fixed-rate savings, you can see how much longer your fixed term lasts. You can then make a more informed decision about whether to lock your money into a fixed-rate savings account, or keep your money accessible and wait to see where interest rates are heading.
• If you have different types of borrowing, consider prioritising paying off your most expensive debt first. You could also look for alternative sources of borrowing, such as a 0% credit card or a balance transfer credit card.
• Rising interest rates may make repaying debt more challenging. If you need help managing your debt, you can get free professional help. Read our guide on finding debt help to learn more.

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