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What happens when interest rates rise?

Polly Gilbert
Last Updated 20 May 2024

Rising interest rates impact almost everyone - whether you're saving for your first house, or another big life event, or looking to take out a loan like a mortgage. Find out how rising interest rates impact you in this essential guide.

What happens when interest rates rise?

Rising interest rates increase the return you'll see on your savings, but makes borrowing more expensive. This in turn makes loans such as mortgages less affordable, as repayments will be higher on a higher interest rate, as well as the total amount you'll pay in interest over your mortgage term. However, these increases can be minimal - for example, a 0.25% increase on a £150,000 mortgage would equate to an extra £18 per month.

What does rising interest rates mean?

For savers, rising interest rates are a good thing as you'll earn more interest on your savings. However 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.

See today's best interest rates from across the market with our Mortgage Interest Rate Tracker, or see which schemes you could be eligible for, create a free Tembo recommendation.

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 - now you can get rates above 4% for Cash Lifetime ISAs. 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 do increase, you can earn more for your money.

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 an 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 recommendation 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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