How Do Rising Interest Rates Affect My Mortgage?

How Do Rising Interest Rates Affect My Mortgage?

There has been plenty of talk regarding rising interest rates and the cost-of-living crisis, but what impact do higher interest rates really have on your mortgage? In this blog, we’ll take an in-depth look at how interest rates impact homeowners and what you can do to mitigate rising costs.

What Is the Base Rate?

The Bank of England sets a base rate, which is the interest rate it charges to other financial institutions, such as banks and mortgage lenders. If the base rate is high, it costs banks more to borrow funds and they pass this cost on to their customers (you!) by increasing their own interest rates.

Also designed to control inflation, the base rate may be increased in a bid to prevent inflation from rising too high, too quickly.

As of February 2023, the current Bank of England base rate is 4%, which is the highest it’s been for 14 years. In addition to this, inflation is currently 10.5%. Although inflation has dropped slightly since October 2022, it is still the highest it has been in nearly 40 years.

How Does Interest Rate Affect Mortgage?

When you take out a mortgage, you’ll have the option to choose what type of mortgage you’d like, such as a fixed interest rate, a variable rate, or a tracker. The type of mortgage you have will determine how changes in interest rates affect you, so it’s important to understand the difference.

Fixed Rate Mortgages and Interest Rates

If you have a fixed rate mortgage, you’ll pay the same amount of interest until the deal ends. An increase in interest rates may not affect you straight away if you have a fixed rate mortgage but this doesn’t mean you won’t be impacted at all.

When your current mortgage deal expires, you’ll need to find an alternative. However, if interest rates have risen in the interim period, you’ll find that the deals on offer mean you’ll be paying more each month.

If you’re paying 3% interest on a fixed rate mortgage but your deal comes to end in the next few months, for example, you might find that the best deal you can find has an interest rate of 4%. If so, you’ll be paying more interest overall and your monthly payments will increase.

Tracker Mortgages and Interest Rates

A tracker mortgage mirrors the base rate set by the Bank of England, although it’s usually set a few points higher. As the base rate rises or falls, your interest rate will be modified accordingly. Any change in the base rate does, therefore, have an immediate impact on your mortgage repayments.

Over the past 12 months, the Bank of England’s base rate has risen consistently, moving from 0.5% in February 2022 to 4% in February 2023. While monthly changes to the base rate may seem relatively minor, regular increases quickly add up and may mean that you’re paying significantly more to your mortgage lender each month.

Variable Rate Mortgages and Interest Rates

Variable rate mortgages work in a similar way to tracker mortgages but, instead of mirroring the Bank of England’s base rate, variable rate mortgages use a Standard Variable Rate which is set by the lender. As lenders typically adjust the rate in response to changes the base rate, however, you can expect your mortgage repayments to increase if the base rate rises.

How Will Interest Rate Rise Affect My Mortgage?

Any increase in interest rates will mean you’ll be paying more for your mortgage each month, unless you currently have a fixed interest rate deal in place. For many homeowners, the consistent rise in interest rates over the past year means that monthly costs are continually increasing and, in many cases, are becoming unmanageable.

How Do Interest Rates Affect House Repossessions?

As higher interest rates continue to push mortgage payments up, a considerable number of homeowners will simply be unable to meet their monthly repayment obligations. As a result, people will fall behind with payments and go into arrears. When this happens, their lender may initiate legal proceedings to repossess their property.

Experts are already warning that the number of home repossessions will increase in 2023, due to the continued rise in interest rates. Indeed, we saw a noticeable increase in repossessions following the financial crisis in 2008 and we can expect to see the same pattern emerging as the current financial crisis unfolds.

Statistics show that there was a 30% increase in house repossessions in July – September 2022 compared with the same period in 2021. With further interest rate rises since then, homeowners are under increasing pressure to find the extra funds to cover spiralling costs and higher mortgage repayments.

How to Combat Rising Interest Rates

When interest rates rise and your costs increase, the first thing to do is to reassess your household budget and find ways to cut costs. This might mean foregoing some luxuries and reducing non-essential spending so that you’re able to cover necessary bills.

For some people, finding a new mortgage deal or switching to a different type of mortgage can be a viable way to reduce monthly repayments and make your outgoings more affordable.

Sadly, there will be many people who are simply unable to keep up with rising costs. If you find yourself in this situation, there’s a real chance your home could be repossessed if you fall into mortgage arrears. However, help is at hand and there are steps you can take to prevent home repossession.

Stopping House Repossessions with HomeKeep Solutions

If you’re behind on your mortgage repayments or your lender has already started repossession proceedings, find out how the HomeKeep Solutions team can help you.

We can negotiate with lenders on your behalf and assist you through court proceedings to reduce the risk of losing your home. What’s more – we don’t charge any upfront fees, so you needn’t let your financial situation prevent you from getting the expert help you need.

We’re available 24/7 and our knowledgeable team are always happy to help, so contact HomeKeep Solutions now and prevent home repossession today.