Interest rates have risen consistently over the last couple of years to tackle rising inflation, which has left many of us feeling financially stretched.

This month, the Bank of England held the base rate at 5.25%. While this might be a big relief for people worried about rising borrowing costs, interest rates will likely remain high over the coming months so it’s important to think about how this affects your finances.

Here, we look at what makes interest rates change and explore some of the ways to approach higher rates.

Why do interest rates go up?

Interest rates usually rise when inflation, or the rate at which living costs are increasing, is too high.

When borrowing costs rise, it makes it more expensive for people to spend, which helps dampen economic growth and slows inflation.

Following 14 consecutive increases in the base rate since November 2021, inflation finally began to ease in late summer, and fell to 3.9% in November. However, it then experienced a slight bump to 4% in December, and remained at this level in January. Interest rate increases were on hold while inflation was falling, and the Bank of England could cut rates this year, unless inflation isn’t kept under control.

What do higher interest rates mean for me?

Generally, when interest rates rise it has two key impacts: savers are better off as their savings earn more interest and borrowers are worse off because rates increase on financial products such as loans, mortgages and credit cards.

The impact higher rates may have on you therefore depends on your individual circumstances, and how much you owe and have in savings, along with whether the products you have are on fixed or variable rates. If, for example, you have a fixed rate savings account, the amount of interest you earn will remain the same during the fixed rate term regardless of whether interest rates rise or fall.

Will higher interest rates affect my mortgage?

Whether higher interest rates will affect your mortgage depends on the type of mortgage you have.

If you have a fixed rate mortgage, for example, you’ll have signed up to pay a set interest rate over a specific period of time (i.e. 5.2% for two, three or five years etc). As your mortgage rate is fixed, your monthly payments won’t change if interest rates go up. The key risk is when your fixed term ends as unless you remortgage, you’ll move on to your lender’s Standard Variable Rate, which could be higher than you anticipated, as the SVR will usually increase as interest rates rise. If you do remortgage, although you’re likely to find a much better deal than the SVR, you may still find that you’re on a higher rate than you were previously if interest rates have gone up.

If you have a variable rate mortgage, you’ll normally see your monthly costs rise if interest rates go up, although it will be up to your lender whether they pass on an increase in full. You will definitely see an increase in your monthly repayments if you have a tracker mortgage where your rate tracks the Bank of England base rate, plus a set percentage. While the Bank of England keeping the base rate at 5.25% this month will be a relief to many, lots of people will still be facing high mortgage rates as a result of the last 14 consecutive rises.

If you are concerned about rising interest rates affecting your mortgage there are a few things you might be able to do to help protect yourself from the impact.

1. Consider opting for a fixed rate mortgage over a variable rate deal

Obviously the choice is entirely yours, but if you want to be sure that rising interest rates will not impact your monthly mortgage costs then a fixed rate mortgage could be a better option for you than a variable rate deal, as you’ll have peace of mind your payments won’t change when interest rates move.

2. Don’t delay

If you are ready to make a move on a property, or are looking to remortgage and have found a competitive deal, you may want to act sooner rather than later as the best deals are already disappearing quickly.

3. Consider making mortgage overpayments

A great way to beat the impact of interest rate increases on your mortgage is to drive down the figure that you borrowed. Many lenders will allow you to make overpayments of up to 10% each year, which could save you thousands of pounds in interest in the long run. It will also mean that when you come to remortgage, you are more likely to get a better deal as you will have more equity in your home. Our article Should I consider overpaying my mortgage? looks at the pros and cons of making mortgage overpayments.

4. Avoid moving onto your lender’s standard variable rate (SVR)

If you are on a fixed rate mortgage, when your fixed term ends, your lender will usually automatically roll you onto their SVR, which will be at a considerably higher interest rate than you were previously paying. To avoid being moved onto the SVR, you should start looking to remortgage around three to six months before the end of your fixed term. Most lenders will let you agree terms on a product several months before the start date, meaning you can move straight from your existing deal to your new mortgage without ever going onto your lender’s SVR.

Will higher interest rates affect my loans?

Generally, when you apply for an unsecured loan such as a car on finance, credit card or a personal loan, you will agree to a fixed interest rate for a period of time, so rising interest rates are unlikely to have an impact on your monthly repayments. One exception to this rule is that it is possible that your credit card lender could increase their interest rates and pass this on to you, however they have to notify you first and provide you with an appropriate length of time before the interest rate is brought into effect.

If you are worried about how rising interest rates might affect your loans or credit cards, there are a few things you can do to take more control:

  • Drive down the amount you owe – better than any other defence method, reducing the amount you owe is your best bet to minimise the impact of rising interest rates. If at all possible, it’s best to pay off what you owe before saving as the interest rates you are likely to be charged on what you are likely to be higher than the interest you could earn on your savings. Everyone’s situation is different so make sure you can afford these payments before you start.
  • Know your lender’s interest rise notice period – lenders legally only need to give you 15 days notice before increasing interest rates, so don’t assume that just because you signed up to one interest rate that you will always be paying that.

Will rising interest rates affect my savings?

The good news is that savers are the ones who really benefit from higher interest rates – as long as their savings provider passes on the rates, as they don’t have to unless your account has a rate that tracks movements in the base rate.

Banks and other financial institutions will often compete to offer new customers the best interest rates, so if you have savings and your provider doesn’t pass on a rate increase it can be a great idea to shop around to find the best deal for you. Our article Which cash ISAs pay the most interest? highlights which cash ISAS currently pay the highest returns.

Will higher interest rates affect my pension and investments?

Many pension funds automatically move investors into bonds and cash as they approach retirement, as they are considered less volatile and risky than stocks and shares. A bond is effectively an IOU for a loan, either to a company or a government. If you invest in a bond you receive interest on the loan (normally at a fixed rate), with the capital being paid back at the end of the term. A company bond is called a corporate bond and a UK government bond is a gilt.

When interest rates rise, bond prices tend to fall and their yields increase. Conversely, when interest rates go down, bond prices rise and yields fall, as investors are often tempted back to cash savings when savings accounts are paying higher interest rates.

Steeper interest rates can therefore have a big impact on the value of your pension savings if you have a significant amount invested in bonds or gilts. It’s therefore vital to check where your pension is invested to see how you might be affected by a change in interest rates. Find out more in our article Where is my pension invested?

It’s worth noting that rising bond yields can be good news for anyone looking to buy an annuity, or income for life, as it should mean they are able to secure a better income stream. Find out more about how annuities work in our article Annuities explained.

If you want personal recommendations about where to invest your retirement savings, or what to do with your pension once you reach retirement, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.


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If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

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