How far will interest rates rise, and what could it mean for you?

man with calculator and laptop As you may already know, the UK has recently seen another interest rate increase. In February, the Bank of England (BoE) raised the base rate from 0.25% to 0.5%.

While the base rate still remains historically low, this change could still pose challenges to your personal finances.

Read on to find out why this change has taken place, and how your money might be affected in the coming months.

Why raising interest rates may help slow the rate of inflation

In simple terms, the decision to raise the base rate is linked to the high rate of inflation which, as of February 2022, stood at 5.5%.

As a result of this 30-year high, the UK is experiencing what the Guardian refers to as a “cost of living crisis” that is causing widespread concern among homeowners.

What’s more, inflation is forecast to climb to 7.25% by April, causing the cost of living to rise even further.

So, in response, the BoE raised the base rate to 0.5%, in an attempt to reduce inflation back to the target rate of 2%.

The theory is that a higher base rate means spending will drop, curbing price rises and so helping to slow the rate of inflation.

You might be thinking: if a base rate of 0.5% is historically low, surely it won’t affect me too much?

You are right to think that interest rates are still low compared to previous decades. In 1989, for example, the base rate stood at 14.88%.

However, in the 1980s, the average person had fewer debts and so less interest to pay – in fact, according to Bank Underground, household debt has almost doubled as a percentage of GDP in the 40 years to 2019.

So, although interest rates are still vastly lower than they were in the 1980s, the effect of this 0.25% rise could still be felt heavily in your household.

Interest rates are forecast to continue rising in the coming years

If the rate of inflation remains high, interest rates are also likely to be increased again.

According to The Times Money Mentor, experts believe that the base rate could reach 1.25% by the end of 2022, and perhaps even progress to 3% the following year.

So, it may be wise to begin preparing for another interest rate increase when it comes to your personal finances.

Rising interest rates could affect your mortgage and savings

Of course, your main concern when it comes to the topic of interest is how it will affect your money.

While a rise in interest is designed to decrease the rate of inflation, it could also make other aspects of your life more expensive, such as your mortgage.

Your current mortgage

Depending on the type of mortgage you have, it may be affected by rising interest rates.

For example:

  • Your tracker-rate mortgage repayments will increase in line with the base rate because tracker mortgage rates are typically linked directly to the base rate.
  • Your variable-rate mortgage payments may increase if your lender were to pass on the base rate rise to borrowers.
  • Your fixed-rate mortgage is likely to be safe from the base rate increase, because your monthly repayments are fixed for an agreed-upon term.

If you’re on a variable- or tracker-rate mortgage, and there are no early repayment charges for switching away from the deal you’re on, it may be worth considering the security of a fixed-rate mortgage for the months and years ahead.

Your future mortgage

If you do not already have a mortgage and are planning to apply for one in 2022, it may be wise to consider carefully how the interest rate could affect your application.

Firstly, inflation could pose a potential problem, as it could reduce the real value of your cash savings if the interest rate you receive is lower than the rate of inflation. Plus, rising interest rates mean you may need to budget for higher monthly mortgage repayments than you had anticipated.

On a positive note, the mortgage market is predicted by UK Finance to return from the “wild west” of 2021’s mortgage lending surge, to a calmer, more stable position in 2022. This possible return to pre-pandemic lending patterns might enable you to have a wider choice of mortgage options in 2022 and 2023.

If you are keen to discuss mortgage options, contact us for guidance on securing the right deal for you. We can help you access mortgage lenders who can provide a suitable deal for your circumstances.

Your savings

While you might be concerned about how the base rate rise could negatively affect your money, there are some positives to note from this move.

Notably, your savings might see more positive returns as a result of this increase in interest rates. While the return on your cash savings remains at a historically low level, if your bank or building society passes on the rate rise then you can expect to see your interest increase in 2022.

The Bank of England may eventually stop raising interest rates

If raising the base rate does begin to stall the rate of inflation, the BoE may choose to curb interest rates as well.

The balance between interest and inflation is always shifting, so it is hard to predict when this may happen – however, experts are predicting that this eventual slowdown could occur in 2023.

Get in touch

While the cost of living remains high in 2022, and interest rates are rising, it can be highly beneficial to work with a mortgage expert. In these trying times, professional guidance can make a huge difference to both your financial situation and your peace of mind.

Email [email protected] or call 0131 339 2281 to speak to us.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

In addition, the value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.


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