You may have been hoping that mortgage rates would soon start falling. But recent headlines suggest borrowing costs could stay higher for longer. The Bank of England may delay cutting interest rates and could even raise them again if inflation begins to rise, particularly if energy prices increase.
If you have a mortgage, news like this can feel worrying. Interest rate changes can affect what you pay each month, especially if you’re on a variable rate mortgage or your fixed deal is coming to an end.
Why interest rates could rise again
The Bank of England uses interest rates to help keep inflation under control. Inflation is simply the rate at which prices rise over time. When inflation is high, everyday essentials such as food, fuel, energy and housing become more expensive.
Energy prices can have a big influence on inflation. If global oil or gas prices rise, as a result of supply disruptions or tensions in oil-producing regions, those higher costs can quickly ripple through the wider economy.
If inflation starts climbing again, the Bank of England may decide to keep interest rates higher for longer or even increase them further to help bring price rises back under control.
How interest rates affect inflation
Interest rates also influence how expensive it is to borrow money. That matters because borrowing costs affect how much people and businesses spend.
When interest rates rise, borrowing becomes more expensive. Mortgage payments can increase and loans or credit card borrowing may cost more too. That often means households and businesses have less money available to spend.
When spending slows down, businesses may find it harder to keep raising prices. Lower demand can help bring inflation down.
When interest rates fall, borrowing becomes cheaper. That can encourage spending and investment, which helps support economic growth. But if demand grows too quickly, prices can start rising again, because of this balancing act, central banks tend to adjust interest rates gradually rather than making sudden changes.
Why mortgage rates move when interest rates change
Mortgage rates are closely linked to the Bank of England’s base rate because it influences borrowing costs across the financial system. When the base rate rises, it usually becomes more expensive for lenders to borrow money. Lenders often pass those higher costs on through the mortgage rates they offer.
However, mortgage rates do not always move in perfect step with the base rate. Lenders also consider things like inflation forecasts, financial market expectations and competition when setting their rates.
That’s why mortgage rates sometimes change before the Bank of England actually adjusts the base rate, particularly if financial markets expect a rate change in the near future.
Fixed and variable mortgages — what it means for you
How interest rate changes affect you depends largely on the type of mortgage you have.
With a fixed-rate mortgage, your interest rate stays the same for a set period — often two, three or five years. During that time your monthly payments usually remain unchanged, even if the Bank of England base rate moves. Many homeowners prefer this because it makes budgeting easier.
But fixed deals don’t last forever. When your fixed period ends, your lender will usually move you onto their standard variable rate unless you switch to a new mortgage deal. If interest rates have risen since you first took out your mortgage, the new deal available may be more expensive.
Variable rate mortgages work differently. The interest rate can change over time, which means your payments may go up or down.
Some mortgages track the Bank of England base rate directly, while others follow a rate set by the lender. Because these rates can change, borrowers on variable deals often feel the impact of interest rate increases more quickly.
What happens if mortgage payments rise
If mortgage rates increase, the most immediate effect for many households is higher monthly repayments. How much your payments could change depends on several factors, including the size of your mortgage, the interest rate you’re paying and how long you have left on your mortgage term.
For some households the increase may be manageable. For others, particularly when energy bills and everyday living costs are already high, even a small rise can put extra pressure on the household budget.
If you’re worried about keeping up with mortgage payments, it’s usually best to speak to your lender as early as possible. Lenders are expected to treat customers fairly and may be able to discuss options if you’re experiencing financial difficulty.
Why renters may feel the impact too
Interest rate changes do not only affect homeowners. If you rent your home, you may also feel the effects, as any landlords have mortgages on the properties they rent out. If their borrowing costs rise significantly, the cost of owning that property increases. In some cases, landlords may try to offset those costs by raising rents when a tenancy renews or when a new tenant moves in.
Rent increases usually need to follow certain rules and require notice. However, higher borrowing costs across the housing market can still contribute to rising rents over time. If you rent and face a rent increase that does not seem fair, you may be able to challenge it depending on your tenancy agreement and circumstances.
If you are struggling with mortgage payments
If your mortgage payments become difficult to manage, contacting your lender early can make a real difference. Many lenders have specialist teams who support customers experiencing financial difficulty and may be able to discuss possible options with you.
You can also seek free guidance from independent organisations such as Citizens Advice, StepChange Debt Charity and National Debtline. These services can help you understand your situation and talk through possible next steps.
Resolver does not provide financial advice, but it can help you raise complaints and escalate through the appropriate channels if you believe you have been treated unfairly.
If you feel your lender has not treated you fairly
If you believe your mortgage provider has handled your situation poorly, for example by ignoring a complaint or failing to respond properly, you have the right to raise the issue formally.
You should first complain directly to your lender. If you remain unhappy with their response, you may be able to escalate the complaint to the Financial Ombudsman Service. The Ombudsman reviews disputes between consumers and financial companies.
If you have any thoughts on this topic, or any consumer issues you would like us to cover, feel free to get in touch at support@resolver.co.uk.
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