How to prepare for an interest rate rise

Interest rates in the UK are set by the Monetary Policy Committee (MPC) of the Bank of England (BoE). This is the interest rate at which banks borrow from the BoE.

When you hear on the news that interest rates have gone up, it means the MPC has decided to increase the base rate.

Banks are not obliged to follow Bank of England interest rate decisions, but they can influence the cost of borrowing, or how much interest you earn on savings.

When, and if, your mortgage repayments are affected by an interest rate change will depend on what type of mortgage you have and when your current deal ends.

If you have a variable rate tracker mortgage, linked to the BoE base rate you are likely to see an immediate impact on your mortgage repayments if there is an interest rate rise.

Those on a standard variable rate mortgage will probably see an increase in their rate in line with any interest rate rise. How much is decided by your lender, so this isn’t guaranteed. If you are unsure, check your mortgage terms and conditions in your original mortgage offer document.

People with fixed rate mortgages are likely to be affected once they reach the end of their current deal. An interest rate rise could make re-mortgaging more expensive.

It’s a good idea to have a financial plan in place to deal with any potential interest rate changes. The base rate is the highest it's been in 16 years, which likely means you’ll need to budget for higher monthly costs if:

• applying for a new mortgage
• remortgaging from a fixed rate
• have a tracker or variable rate mortgage. 

This is how much a £200,000 mortgage at a current interest rate of 2.5% would increase by (based on a 25 year term, the current monthly repayment is £897): 

How you’ll be affected by an interest rate rise depends on what mortgage you’re on and when your deal comes to an end. If you don’t know, check your paperwork or with your mortgage provider to find out. Read our guide for more help understanding the different types of mortgages

Now you know what mortgage you’re on, you’re in a better position to find out how this will affect your finances and when you’re likely to see this change. Use the MoneySavingExpert Calculator to work out the impact.

If your mortgage repayments are likely to go up, work out if you can afford the increase. Create a budget and see if there are any areas you might be able to cut back. If the increases are likely to be in the future, then start building up a savings buffer so you’ll be able to afford your mortgage when they hit.

Talk to your lender. See our guide on Talking to your creditor for the steps you can take now.

You can also explore the Government help available if you can’t pay your mortgage.

Speak to a debt adviser – they can help you budget and assess your income and spending early before you get into any financial difficulty. 

Use our debt advice locator tool to find free debt advice.

It might seem like a strange time to be focusing on this, but by working to improve your credit score, you will be able to get a better deal when your deal comes to an end or you remortgage.

If your current deal is coming to an end you should definitely be looking at switching to make sure you’re on the best rate. But it can also be worth looking if you’ve got some time left on your current deal. You might have to pay some fees, but if the savings are worth it you should still switch. For more information on comparing mortgage deals read our page on reviewing your mortgage regularly

It might be a little while before an interest rate rise hits you in the pocket, so take advantage of the low rate you’re currently enjoying and pay extra. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first. Read our page on paying off your mortgage early

Other forms of borrowing (non-mortgage), both secured and unsecured, could be affected by an interest rate rise. This might include any current borrowing you have in the form of loans, credit cards and overdrafts.

Most unsecured borrowing such as a personal loan, for example, finance to buy a car, won’t usually be affected by an interest rate change. This is because you agreed to a fixed rate of interest when you took out the loan.

It’s also possible for the interest rate on your credit card or overdraft to rise, although they are not directly linked any change in the BoE base rate. You’ll be given notice before this happens, subject to the terms and conditions of your account.

You have the option to cancel the credit card and repay the outstanding balance within 60 days. Any interest added during this time will be charged at the lower rate.

Check out our guide to credit cards for more information.

If you are looking to take out a personal loan after an interest rate rise, you may find the cost of new borrowing has increased.

It’s not all bad news when interest rates go up. If you’re a saver you could see an increase in the rates you are getting on variable rate saving accounts and Cash ISAs.

Banks and building societies will compete to offer the best interest rates on savings accounts. This means it’s very important to shop around to make sure you have the right account for you with the best interest rate.

Read our guide Getting into the savings habit.

Interest rate rises can be good news for people about to buy an annuity. Annuity rates are linked to gilt yields and pay a guaranteed income for life or a fixed term. The income you receive can be locked in on the day you purchase your annuity (subject to indexing etc.), so current annuity rates can make a big difference to your long-term financial security.

If you’re looking to buy an annuity, an interest rate rise can be very good news as it means you’ll get a better rate of return. Find out more in our guide Guaranteed retirement income (annuities) explained.

People who have already taken out an annuity can’t switch, however, you can still benefit from better interest rates by putting the money from the annuity into a savings account.