Cost of living rises are worrying most of us, and homeowners are no different, with interest rates hovering near their highest level in over 16 years. But there might be some relief on the way after the Bank of England announced a reduction to the base rate.

What is a mortgage interest rate?

Mortgage interest rates – or mortgage rates – are agreed with your lender and are what you’ll pay in interest when you borrow money to buy a home. The average rate is usually higher than the Bank of England’s base rate.

What is the Bank of England base rate now?

The base rate is currently 5%.

How will an interest rate change affect me?

Most people with a mortgage will be affected by a change in interest rates in some way. What impact it has will depend on the type of mortgage you have, among a range of other factors.

If the base rate goes up or down, your mortgage payments could change, especially if you have a variable or tracker rate. Your payments might go down if the base rate is reduced and go up if the rate increases.

If you have a fixed-rate mortgage, your payments won't change until your fixed-rate period ends and you move to your lender's standard variable rate. 

Standard Variable Rate (SVR) mortgages

A Standard Variable Rate is set by the mortgage lender and usually follows the Bank of England’s base rate movements.

While rates may not change as much as tracker rate mortgages, lenders will likely pass on an interest rate rise or fall onto their customers. This means you could see a change to your monthly bill  as soon as your next payment.

Your mortgage lender should send you a letter explaining the new rate and what you can expect to pay. If you have an SVR mortgage and you haven’t heard from your lender, contact them as soon as possible.

There are usually no penalties to leaving an SVR mortgage, so it could be cheaper to switch to a different deal if interest rates rise.

Tracker rate mortgages

Tracker rate mortgages move in line with another rate – usually the Bank of England’s base rate, plus a few percent. If the base rate goes up by 0.25%, your monthly cost will go up by the same amount.

Tracker rates usually last between two to five years before reverting to an SVR, so you could try to switch to a fixed rate if you’re at the end of your term and are worried about a change in interest rate. However, some tracker rates last for the life of your mortgage.

Fixed-rate mortgages

A fixed-rate mortgage doesn’t change when interest rates do, which can help when the economy is in turmoil, but also means you might not feel the benefit from a fall in interest rates until your fixed term ends.

However, if you’re coming to the end of your fixed-rate term, you can speak to a mortgage advisor about remortgaging before the rates change. If it looks like they are rising, it’s worth doing it as soon as possible.

If you don’t remortgage, your rate will automatically change to an SVR, which will rise (or drop) with interest rates.

Discounted rate mortgages

Discounted rates are set slightly below SVR, but only for a certain time. Discounted rates increase when SVR rates and the Bank of England’s rate increase, so when this happens you will pay more each month.

Rising mortgage rates can be very stressful. If you’re worried, stressed or finding it difficult to cope, the MoneyHelper guide on Money problems and mental wellbeing shows you where to get help.

Why are mortgage rates so high?

The Bank of England sets the benchmark interest rate, called the 'base rate' or ‘Bank Rate’. While the base rate was low for over a decade, economic uncertainty over the last few years caused the Bank of England to increase the base rate as a way to try to control inflation. With the announcement of a reduction to the base rate, we’re likely to see a positive impact on people’s mortgages.

Changes in the interest rate affect not only mortgages, but also credit cards, loans and how much you can earn on savings. It’s unlikely that you’ll see such an immediate impact on these other products, however.

What will interest rates be by the end of 2024?

Experts predict interest rates may continue to fall by the end of 2024. It’s impossible to know for certain what is going to happen so try not to make large financial decisions now based on the hope rates go down in the future. 

If you’re struggling to pay your mortgage

If increased interest rates have made your mortgage payments unaffordable, it’s important to seek help as soon as possible. Find out what you can do with the guide on Mortgage arrears or problems paying your mortgage.