What do rising interest rates mean for you?

Interest rates are at their highest level since 2008 as the Bank of England tries to combat high inflation and the cost of living crisis. We explore how the latest rise could affect you, from your mortgage and loan repayments to your savings.

The Bank of England (BoE) hiked interest rates from 3% to 3.5% in December as it attempts to tame rising prices and soaring inflation. Higher interest rates make borrowing money more expensive, so the central bank hopes this move will encourage people to put off spending and save instead. This is easier said than done – especially if you’re feeling the effects through your mortgage or another type of loan repayment.

How do higher interest rates affect your mortgage?

Most people with a mortgage have a fixed one, which means the rate stays the same for the fixed term. This means you won’t need to worry about higher interest rates until this deal ends.

You could end up paying more if you have a tracker mortgage (which tracks the BoE base rate) or standard variable rate (SVR) mortgage – usually where your lender charges you the reversionary interest rate after your initial term ends, unless you have opted to stay on an SVR. SVRs change at the lender's discretion, but if you have a £200,000 repayment mortgage over a 25-year term, a rise from 2% to 6% would add around £10,500 onto your total repayments over two years.

So, what are your options? With more rate rises expected in the months ahead, it might be wise to look for a new mortgage rate if you’re on a fixed deal that ends soon. Be aware that you'll often have to pay a non-refundable arrangement fee. Many lenders will give you an offer that you’ll have up to six months to take, so you can lock it in now to save you worrying further down the line.

It can be important to try to move quickly in the current climate because lenders are constantly changing their offers due to high demand – mortgage comparison sites can give you a good idea of the best deals available now. You’ll also need to watch out for any early repayment charges or exit fees if you’re thinking about switching before your current deal ends. Before switching, you should also consider if your existing mortgage has any features or benefits that you might lose. If you're at all unsure, talk to an independent financial adviser to discuss your options.

What about loans and credit cards?

Even if you don’t have a mortgage, the latest rate rise could still affect you because it can influence the interest on things like bank loans, car finance and credit cards. If you’re looking for a new deal on these products, you might find that the cost of borrowing has increased. To avoid paying higher rates on your credit card, aim to pay off your balance in full every month or at least within any introductory low-interest period. If you already have a personal loan or car finance, you probably agreed to a fixed rate of interest, so the latest rate rise is unlikely to impact you. Check with your provider if you're unsure.

Will higher interest rates benefit your savings?

The good news is that banks and building societies will often pass on higher interest rates to savers (though this isn’t guaranteed). The top rate easy access rate has now increased to about 2.6%, up from 0.20% in December 2021.

Remember that although savings rates are rising, they are being outpaced by inflation and your money could still be losing value in real terms (which means it may not have the same spending power as when you first put it away). Budgeting can help you make the most of your money, so if you do have some left aside each month, it might be worthwhile considering the benefit of paying down any debt you owe.