Cost of living rises are worrying most of us, and homeowners are no different, with interest rates at their highest level in over a decade. The Bank of England increased the base rate in order to tackle rising inflation, which means you’ll likely see an increase in your monthly mortgage payments if you don’t have a fixed-rate or are coming to the end of one.

What is the mortgage interest rate?

The current base rate set by the Bank of England is 3%, an increase from the 2.25% rate earlier this year, and much higher than the rate of 0.15% in December 2021. The rate changed on 3 November 2022 in response to the government’s ‘mini budget’. 

Mortgage rates are agreed with your lender and are higher than the Bank of England’s base rate. New mortgages may be between 4 and 6%, or even higher.

How will the interest rate rise affect me?

Most people with a mortgage will be affected by the rise in interest rates in some way. How much more you will need to pay will depend on the type of mortgage you have, among a range of other factors.

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 rise as much as tracker rate mortgages, lenders will likely pass on the interest rate rise onto their customers. This means your payments could increase 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.

Tracker rate mortgages

Tracker rates mortgages move change in link with another rate – usually the Bank of England’s base rate, plus a few percent. Since the base rate has gone up by 0.75%, 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. 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. If you’re on a fixed rate mortgage, your payments shouldn’t change for now.

However, if you’re coming to the end of your fixed rate term, you can speak to a mortgage advisor about re-mortgaging before the rates increase again. It’s worth doing it as soon as possible.

If you don’t re-mortgage, 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 you will pay more each month.

Why are mortgage rates going up?

The Bank of England sets the benchmark interest rate. You may have heard it called the 'base rate' or ‘Bank Rate’. While the base rate has been low for over a decade, economic uncertainty caused the Bank of England to increase it. Increasing interest rates is one way to try to control inflation.

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.

Interest rates have been low since 2009 in response to the financial crisis. They stayed low, reaching their lowest point at 0.1% between March 2020 and December 2021, as part of an effort to help the economy during the coronavirus pandemic.

What will interest rates be in 2023 and 2024?

It’s impossible to know for certain what is going to happen, but the Bank of England predicts that they’ll need to increase the base rate again in 2023, when it may reach over 4%. This is because the UK’s gross domestic product (GDP) is expected to fall while inflation is rising.

They have yet to publish predictions for 2024. This economic instability means more people may try to find fixed rate mortgages with longer terms so their payments won’t change.

If you’re struggling to pay your mortgage

If the increased interest rates have made your mortgage payments unaffordable, it’s important to seek help as soon as possible.