Last updated: May 06, 2024

What does the interest rate rise mean for you?

Michael Harms AFPS
Director & Chartered Financial Planner at Mortgages for Doctors

What does the interest rate rise mean for you?

As you will have seen recently, the Bank of England announced its 13th consecutive interest rate rise since December 2021, taking the base rate to 5%.

While interest rate rises are essential to tackling inflation, they will be worrying for people with mortgages.

So let’s take a look at what it might mean for you.

Firstly, why are mortgages going up?

The increase in mortgage rates can be attributed to the prevailing economic conditions and monetary policy decisions.

Central banks, such as the Bank of England (BoE), often adjust interest rates to manage inflation and stabilise the economy. When the economy shows signs of overheating or inflationary pressures, the BoE may raise rates to curb spending and control inflation.

Higher interest rates make borrowing more expensive, which helps reduce demand for loans and can cool down the economy. As a result, mortgage rates rise as lenders adjust their rates to reflect the increased cost of borrowing.

Does it work?

The effectiveness of interest rate rises in achieving their intended goals is a subject of ongoing debate among economists and policymakers. It depends on various factors, including the stage of the economic cycle and the responsiveness of consumers and businesses to changes in borrowing costs.

While higher rates can indeed moderate economic activity, their impact may not always be immediate or uniform across sectors.

Ultimately, the success of interest rate rises in achieving their intended outcomes depends on careful assessment and management of the broader economic context.

What does it mean for you?

Higher monthly payments:

One of the immediate consequences of an interest rate rise is the increase in monthly mortgage payments for homeowners with variable or tracker rate mortgages.

For example, a household with a tracker mortgage currently at 5.5% will see their pay rate rise to 6%. Assuming they have a £150,000 repayment mortgage with 20 years remaining, their monthly payments will rise from £1,032 to £1,075, which is an additional £43 a month.

This may not sound like much, but this increase will have come on top of previous interest rate rises throughout the past 12 months.

Affordability challenges:

For those planning to enter the property market or looking to remortgage, a higher interest rate environment can present challenges. The increased cost of borrowing may reduce affordability for many. This situation could make it more difficult for people to secure mortgages, especially for first-time buyers or those with already stretched budgets.

Fixed-rate mortgages:

A fixed-rate mortgage is a type of mortgage where the interest rate stays the same for the duration of your deal. There are more than 6.8 million households with a fixed-rate mortgage currently, which means they will be unaffected by the latest rise.  

However once their deal ends, they will feel a big change in their repayments. More than 350,000 borrowers will come off a fixed-rate deal between now and the end of September.

If you’re one of these, please get in touch.

Impact on budgeting and financial planning:

An interest rate rise can disrupt the financial planning of mortgage owners. Increased monthly payments may put strain on household budgets, necessitating adjustments in discretionary spending or other financial commitments.

Homeowners should carefully assess their current financial situation and factor in potential interest rate fluctuations when planning for the future. Working closely with an expert like us can help develop strategies to manage increased mortgage costs and mitigate any adverse effects.

In summary, the interest rate rise carries significant implications for mortgage owners. Higher monthly payments, challenges in affordability, potential impact on fixed-rate mortgages, and the need for careful financial planning are all factors that homeowners should consider in light of this development.

We can help you proactively manage your mortgage commitments, and help you navigate the changing interest rate landscape and safeguard your financial well-being.

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