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Are interest rates rising and what does it mean for me?

Anya Gair
Last Updated 17 April 2024

Find out what's happening with interest rates and if they are going up or down in this essential guide.

In this guide

Are interest rates going up?

Although interest rates are currently above the typical 4-5% mark, they have been coming down since the start of August 2023. The average 2 year fixed rate mortgage is now 5.1%, while the average 5 year fixed rate is 4.86%. This is a significant fall from the July peak of 6.86%, and a fall from 5.75% and 5.33% at the end of February 2024. However, rates are still much higher than December 2021 when the average two-year fixed rate stood at 2.34%. The good news is, although the base rate has stayed at 5.25% since August 2023, inflation has been gradually coming down. If inflation declines further, it's likely the Bank of England will decrease the base rate in 2024, which should cause mortgage lenders to reduce their own rates further.

Interest rates are accurate as of April 2024.

Why are interest rates going up?

Interest rates are currently going down, but they went up in early 2023 because inflation was too high. In response, the Bank of England repeatedly increased the base rate of interest, which increased borrowing costs. This was intended to reduce our disposable income so that we all spend less on goods and services. This reduction in demand then means companies reduce prices, or at least not increase them as quickly, which in turn brings inflation down. By keeping the base rate high, the Bank of England also increases the amount it charges other banks to borrow money. Because it's more expensive for them to borrow money, banks typically increase their own interest rates as a result.

What is inflation and how does it impact mortgage interest rates?

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LTV: 90.00%

The interest rates shown are an indication only and are not guaranteed. Current rates may have changed by the time you come to apply.

Why is the base rate going up?

The base rate currently is not going up. It did increase multiple times over 2023 because the Bank of England was trying to stop consumers from spending and borrowing as much. Inflation is currently 3.2%, down from 3.4% in February, which means prices for things like energy, food and services are still high, making everyone's budgets more stretched. Although the central Bank hasn't increased the base rate since August 2023, it's stayed high at 5.25%.

By keeping the base rate high the Bank of England has been trying to slow down consumer activity, which means companies can’t increase their prices so quickly. So far this has been working, reducing inflation from the 11.1% peak in October 2022 to 3.2%. Experts have predicted inflation will fall to 2.5% this year and we won't reach the Bank's 2% target until 2025.

How high will interest rates go?

Despite staying stagnant over the last few months, inflation has begun to come back down again. If this continues across the rest of 2024, mortgage rates should come down further. However, it’s likely we won’t see sub-4% mortgage deals as standard until the end of 2024 or even longer.


How do rising interest rates impact first-time buyers?

When interest rates rise, this makes mortgages more expensive as it increases the amount of interest you pay each month alongside paying off your mortgage loan. If you're a first-time buyer, higher interest rates might mean that you have to borrow less for a mortgage in order to afford the monthly repayments, or put down a larger deposit to get a lower LTV. If you're still saving towards your first home, high interest rates can be a good thing however if saving rates are also high, as you could earn more money on your savings.

If you're struggling to save for a house, don't worry. Set up a Cash Lifetime ISA with us today to benefit from our market-leading 4.3% AER (variable) interest rate, plus a free 25% bonus from the government. There are also ways to buy a home with a small deposit, as well as schemes that help you boost your deposit size.

You might also like: Best mortgages for first time buyers Learn more about how interest rates work in our What are mortgage interest rates? guide.

How do rising interest rates impact homeowners?

If you already own a home, the rising interest rates will only impact you if you are coming to the end of your current fixed rate deal and are looking to remortgage, or you are on a variable rate. Over 1.4 million households are facing repayment rises this year once they remortgage onto a new deal. In fact, the average household looking to remortgage next year could see a £2,900 increase to their repayments.

So if you're worried about your mortgage costs rising, you're not alone. The good news is, if you're struggling to remortgage you're in the right place. At Tembo, we're experts in helping homeowners increase their affordability so they can access lower interest rates and stay in the home they love. To find out what remortgage rates you could get, create a free Tembo recommendation, personalised to you.

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