Interest rates are soaring constantly, which is leaving unprecedented effects on your pocket. According to a report from BBC, the Bank of England put interest rates 14 times in a row in August, which means adding pressure for some homeowners; however, it is good news for savers. Prices rose at the peak of 11.1% in October 2022, which brought down to 6.8% in July 2023. However, core inflation is relatively higher, as it was recorded at 6.9% in July 2023.

The current base rate is expected to rise from 5.25% to 5.5%. Interest rates have been rising because of too much inflation. Higher interest rates will make it more expensive for you to borrow money. The philosophy behind raising interest rates is to encourage savings and reduce borrowing and spending.

There are multiple factors that influence the decision of the Bank of England in deciding the base rate, which include:

  • How fast prices are soaring
  • How the UK economy is growing
  • How many people are employed

But of late, the UK has faced a 7.8% growth in wages. They are rising even faster than the inflation rates, adding worries to the policymakers because this will fuel inflation.

What will be the impact on your mortgage?

The rise in interest rates is not good news for homeowners. According to a housing survey, almost one-third of the population owns a mortgage, and unfortunately, this will make it more expensive for them. However, to some extent, it depends on the type of mortgage you have.

For instance, if you have a standard variable interest rate mortgage or a tracker mortgage, your monthly payments will immediately shoot up, and this is because the instalment amount depends on the base rate. When it increases, the instalment amount will proportionately increase, and when it falls down, the payment amount will whittle down.

Since December 2021, one in every four mortgage buyer has faced their mortgage payments going up every one and a half months. Your lender will notify you when the Bank of England increases or decreases the base rate in advance so you can make a budget according to revised payments.

Based on the current base rate, the standard variable rate is 8.09%, while the tracker mortgages charge 6.52%. It means you will be paying an additional £33 every month when you are on a standard variable mortgage and £31 when you are owed a tracker mortgage if it is worth £200,000 for 25 years.

What will be the impact of the base rate on a fixed-rate mortgage?

 As you are on a fixed interest rate deal, you will not see any change in your payment schedule. This is because fixed interest will remain the same throughout the fixed term. Once your fixed term expires, you will be put on a standard variable interest rate deal, which means your payments will be affected by the base rate.

However, mortgage buyers who are applying now will experience a higher fixed interest rate than those who took out a mortgage in the previous year. So, as the base rate keeps increasing, fixed-interest rate deals will also become expensive for new buyers.

It is much more affordable as you can easily budget around the monthly instalment, but you will end up paying down slightly more money compared to those who took out a mortgage in previous years.

Is it the best time to remortgage?

If your fixed interest rate term is about to expire, you should remortgage your loan because otherwise, your lender will automatically put you on a variable interest deal. However, make sure you start the process six months.

You can remortgage with the same lender. This will save you lots of time and early repayment fees. However, you are still required to shop around, as there is no guarantee that you will get money at lower interest rates.

As the base rate is high, you should be careful while remortgaging so you do not end up getting an expensive deal. Here are the tips you should follow:

1.  Consult a broker

As the interest rates are changing rapidly, it makes sense to consult a broker. Because they have complete knowledge about the market, they can give you a heads-up about the right time to remortgage. It will cost you brokerage fees, but it is worth it if you remortgage through a broker.

2.  Associated fees

Look out for early repayment charges and exit fees if you are looking to remortgage from another lender. Do not forget the other costs, such as arrangement fees, valuation charges and solicitor fees. Make sure that the interest you pay on a new deal is cheaper despite all associated fees than the interest you will pay by porting your mortgage with the same lender. A broker can help you make a decision.

What will be the impact of rising interest rates on credit cards and loans?

Not to mention, the interest rates for car loans, loans with no guarantor needed for bad credit, and credit cards. While the average interest rate for bank overdrafts is 21.77%, credit cards charge 20.42%. Likewise, the average interest rates for personal loans rose from 8.26% to 8.41%. Interest rates will keep rising if the prices keep going up.

How will your savings be affected?

Technically, it is good news for savers as people will get more interest in savings accounts and fixed deposits. However, you will have to do a lot of research to know how much interest you will get. Banks have been warned against offering unjustifiable interest on their savings, but unfortunately, the interest rates you get on your savings do not keep up with the inflation rates.

It means loans, credit cards, overdrafts, and mortgages are becoming very expensive, but you will not get very low interest if you want to build your savings. In other words, your buying power is falling day by day.

What will be the effect of soaring interest rates on the housing market?

The housing market performs well when the economy is in favourable conditions. When people are employed, jobs are secured, wages are high, interest rates are low, the prices of houses are not so high, and banks are willing to lend money to people.

The cost of living and interest rates are constantly increasing, a conspicuous reason for chipping away at your housing budget. Although the prices of houses have dropped since the interest rates rose, this change is not enough to offset the impact of rising inflation.

The cost of buying a house is cheaper only when the interest rates are low and vice-versa. So, it is easy to conclude that rising inflation has no good impact on the housing market. The slowdown has been recorded at 15% due to poor borrowing power. Prices are expected to fall in coming months but then will remain stagnant for a couple of years.

The bottom line

With the constant rise in the cost of living, interest rates are increasing in order to curb inflation. This makes it more expensive for borrowers to take on new loans, credit cards, overdrafts and mortgages.