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How will rising interest rates affect mortgage payments?

As the cost of living crisis goes on, UK interest rates have continued to rise. Caused by inflation, this sharp increase affects the finances of the whole country, including people with mortgages.

As the cost of living crisis goes on, UK interest rates have continued to rise. Caused by inflation, this sharp increase affects the finances of the whole country, including people with mortgages.

Written by
Sajni Shah
Consumer expert on money and utilities
Last Updated
22 JUNE 2023
7 min read
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What are UK interest rates currently?

When looking at the Bank of England base rate history, the base rate was at a historic low of 0.1% in December 2021. In August 2023, the current Bank of England base rate rose to 5.25%. This is the highest level for 15 years.

The base rate set by the Bank of England is used by other banks to set their own interest rates. Interest rates are used to calculate the cost of borrowing (e.g. loans and mortgages) as well as the interest paid on savings (e.g. current accounts and savings accounts). This means the Bank of England base rate has huge influence over the finances of the UK. 

Why are interest rates rising and when will they stop?

The interest rate rise is an attempt to control inflation. Soaring inflation has been caused by rising energy costs and Russia’s invasion of Ukraine severely impacting supply around the world.

There’s no timeline for when interest rates will stop rising. The uncertainty surrounding the war in Ukraine has caused financial difficulty for many. As long as the war continues, the economy may continue to face challenges, including further interest rate rises. This makes interest rate predictions difficult to make. 

What does the interest rate rise mean for mortgages?

If you were wondering “are mortgage rates going up?”, it depends on the type of mortgage you’re on. An interest rate rise will affect your mortgage differently:

Fixed-rate mortgage

If you’re on a fixed-rate mortgage, you don’t need to worry about a rise in interest rates yet. Your mortgage rate and monthly repayments will remain the same for the agreed period of time (three years, five years, etc.), regardless of whether interest rates rise or fall.

However, once your fixed term ends, you’ll automatically be moved to your mortgage lender’s standard variable rate (SVR), which is guided by the Bank of England base rate. If this has risen, you’ll likely pay a higher interest rate on your mortgage, likely raising your monthly payments. 

Discounted, tracker or SVR mortgage

A discounted mortgage is a deal that offers a fixed discount on the lender’s standard variable rate (SVR). For example, if the SVR was 6.5%, your mortgage could be a fixed discount of 1%. This would make your mortgage rate 5.5%. However, if the standard variable rate then changed, your mortgage rate would change in line with this. So, for example, if the SVR rose to 7%, your discounted rate would rise to 6%. 

Tracker mortgages are another type of variable rate mortgage, but they’re linked to the Bank of England base rate. As an example, a tracker mortgage could be set 1% above the base rate. In December 2021, this would mean your mortgage rate would be 1.1%. However, in June 2023, it would have risen to 6%. In this example, your mortgage rate will have almost increased sixfold, significantly raising your monthly repayments. 

If you’re simply on a standard variable rate mortgage, your mortgage rate could change at any time. This means your monthly payments could go up or down over the course of your mortgage term. 

Interest-only or repayment mortgage

With an interest-only mortgage, you only repay the interest on the loan. This means you’re not repaying the capital during the term of the mortgage, unless you make an overpayment or switch mortgage types. Because you’re not repaying the capital of the loan, your monthly repayments will usually be lower than a repayment mortgage. 

With an interest-only mortgage, you pay interest on the same balance for the full mortgage term (unless you make an overpayment on the original capital). At the end of the term, you must repay the balance in full.

With a repayment mortgage, you’re repaying both the interest and capital on the loan. This means, if, for example, your mortgage is £200,000 at 6% over 30 years, a portion of your £1,199 monthly payment would go towards paying off the £200,000, while the rest would be paying the interest on that balance. Over the course of the mortgage term, the proportion of interest you’re paying will decrease, as you continue to pay off more of the balance. 

How do interest rates affect monthly mortgage payments?

If the rise in interest rates has caused your mortgage rate to rise, your monthly mortgage payments will also cost more. 

Here’s a breakdown of how much more a repayment mortgage could cost each month, based on the mortgage rate increasing: 

Mortgage balance 2% mortgage rate 4% mortgage rate 6% mortgage rate
Monthly repayment on a 25-year mortgage term
£100,000 £424 £528 £644
£200,000 £848 £1,055 £1,289
£300,000 £1,272 £1,583 £1,933
£400,000 £1,696 £2,110 £2,578

What are the changes to Stamp Duty?

In September 2022, the government changed the way Stamp Duty works for buyers in England, Wales and Northern Ireland. They’ve increased the initial threshold, from where you start paying Stamp Duty tax, from £125,000 to £250,000. For first-time buyers, the threshold has increased from £300,000 to £425,000. The exact amount you’ll pay in Stamp Duty will depend on the property’s value.

Should I remortgage now or wait?

It’s a difficult decision. If interest rates rise further, which they’re currently forecast to do, then agreeing a fixed-rate mortgage now may protect you against further mortgage rate increases. However, mortgage providers are, of course, aware of this, and so rates are already rising sharply. 

It’s also important to know that fixed-term mortgages usually come with an early repayment charge, which you’d be forced to pay to switch mortgages, before your existing mortgage deal ends. This may be a significant factor in your decision to switch or not. It may be worth waiting to remortgage until your existing deal is coming to an end, particularly if the early repayment charge is high. You will also need to factor in any fees and charges payable to secure a new deal.  

If you’d like the certainty of knowing what you need to pay each month, a fixed-rate mortgage will provide that for you. That way, you know your mortgage repayments won’t change for the duration of your deal. This will avoid any nasty surprises and allows you to budget for that fixed payment each month. 

Can a mortgage offer be withdrawn?

Yes, mortgage providers often reserve the right to withdraw a mortgage offer. Unfortunately, this could be at any time, including between contracts exchanging and completion.

If your potential lender does withdraw their mortgage offer, you’ll need to start the mortgage application process again. This potentially means another round of eligibility and affordability checks, with lenders reviewing your credit history and credit score to determine a new mortgage offer with potentially a different mortgage rate. 

With interest rates rising and the UK economy uncertain, some lenders have withdrawn mortgage offers and pulled deals from the market. However, there are still many lenders and mortgage products to choose from, which makes comparing mortgages well worth considering, to find the best mortgage rate. 

Need mortgage advice?

If you’re worried or confused about what’s happening with interest rates and how it affects your mortgage, you might want to speak to a mortgage advisor. 

We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice. Get in touch with one of their advisers here. 

Go to L&C mortgages

About London & Country Mortgages Ltd (L&C)

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (FCA) (143002). 

L&C are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria. 

L&C will not charge you a mortgage broker fee should you decide to proceed with a mortgage.

What types of insurance might I need for a mortgage?

There are no legal requirements for insurance when getting a mortgage, but your lender will likely insist that you have at least buildings insurance, in order to protect their investment. If you’re becoming a joint homeowner, you might want to consider life insurance. With the right life insurance policy, you can protect your joint homeowner, financially, if you died before the mortgage is paid off.

Author image Sajni Shah

What our expert says...

"Those soon coming to the end of their fixed rate deal are likely to face a big repayment shock, even if they’re remortgaging. It’s important to compare mortgage products online - checking the available deals and staying aware of what's happening in the market will help you to budget and save for the future."

- Sajni Shah, Consumer expert on money and utilities

Car Finance 247 Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged over 18 or over. Credit is subject to status and eligibility.

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