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Interior of a room at sunset - there's a row of shelves with books & flowers and a clock on the wall.

What happens when interest rates rise?

By Polly Gilbert
Last Updated 16 August 2023

The Bank of England has raised its base rate for the 14th time in a row. This has had a knock on effect on mortgage interest rates, which climbed from the 1-3% during the pandemic to 5% in 2022. While in 2023, interest rates started to come down earlier in the year they have begun to rise again, impacting anyone looking to take out loans of any kind, including mortgages by first time buyers.

What happens when interest rates rise?

Rising interest rates makes borrowing more expensive, which in turn makes monthly repayments increase as well as the total amount a buyer pays in interest over their mortgage term. However, these increases can be minimal - for example, a 0.25% increase to the Bank of England's base rate (BBR) won't result in significant changes: on a £150,000 mortgage, the increase would equate to an extra £18 per month.

What does rising interest rates mean?

Rising interest rates can mean it's harder for home buyers to buy a home, particularly when they are already borrowing the maximum amount available. If you already own a home, rising interest rates will only impact you if you are coming to the end of your current fixed rate mortgage deal and are looking to remortgage, or you are on a variable rate. In which case, your monthly repayments could increase if you move over to a higher interest rate than you were on before.

The good news is, would-be buyers can take comfort in the fact that low deposit mortgages like 95% deals have become increasingly competitive amongst lenders. A couple of years ago, only a handful of these products were available, but now there are significantly more, which gives first time buyers more choice, while competition amongst lenders can reduce rates.

In addition, savvy products such an Income Boost or Deposit Boost help buyers and homeowners to increase their deposit or boost their affordability with the help of a loved one. And new lenders on the market offer schemes such as Deposit Unlock, 5.5x Income Mortgages and gradual ownership schemes for those that don't have family support. To see which of these schemes you could be eligible for, create a free Tembo plan.

See today's best interest rates from across the market with our Mortgage Interest Rate Tracker.

Looking to increase what you can afford? Try Tembo.

Why do interest rates rise?

Interest rates can rise for a variety of reasons, but often it's caused by the cost of borrowing going up from the Bank of England raising its base rate. The Bank of England often does this when inflation is too high, as rising the cost of lending money is a way to bring spending under control, slowing down the pace of inflation.

Will interest rates rise for savers?

When the Bank of England raises its base rate, this often results in banks and building societies raising their own interest rates. When this happens, interest rates on saving and current accounts will increase. This makes any interest rate rise a good time for savers, as you can earn a higher rate of interest on any cash you have in these accounts.

If you're saving up for a house deposit, the rise in interest rates could bode well for you. After historic cuts to the base rate in 2020, some banks and building societies were paying just 0.01% to savers. Account providers are free to do what they want with rates, so there is no guarantee that interest rates will rise in line with the Bank of England's Base Rate (BBR).

However, with a rise in rates comes a more competitive savings market; and if the interest rates on savings accounts does increase, you can earn more for your money, although changes will be marginal. Should savers see the full 0.25% passed on to them, it would be an extra £50 in interest each year on savings of £20,000.

You might like: How to save for a house


If interest rates start rising, this can make getting on the ladder or remortgaging feel unnerving. The best thing you can do in this situation is to talk to a expert on mortgage affordability like Tembo. Our award-winning team can help you discover ways you could boost your mortgage affordability, even when interest rates are rising.

See how much you could afford with Tembo

Discover which of budget boosting schemes you could be eligible for by creating a Tembo plan today. It takes just a matter of minutes to complete and will give you an insight into your true borrowing potential.

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