How to prepare for an interest rate change

Many interest rates in the UK are linked in some way to the Bank of England (BoE) bank rate (or ‘base rate’). This is the interest rate your bank will pay if it needs to borrow money (often so it can then offer mortgages and other loans) and means you’ll usually pay more than the base rate to borrow money.

The base rate is decided by many factors, including what’s happening in the wider UK economy – like the cost of living.

If you hear on the news that interest rates have changed, it’s likely because the base rate has increased or decreased.

Most people with a mortgage could benefit if interest rates fall. Though, it might mean earning less interest on your savings or pension.

But if you have a variable or tracker mortgage, you could see your monthly payment go down with the base rate. Sometimes even from your next repayment.

If you are finishing a fixed-rate mortgage, you could get a lower rate by getting a new deal.

It can increase your monthly repayments or make remortgaging more expensive.

Although lenders don’t have to follow base rate decisions, they can change the cost of borrowing (the interest you pay) for mortgage customers.

Lenders often change their own rates before any BoE announcement, as they predict how the cost of their borrowing may change.

When, and if, your mortgage repayments are affected by an interest rate change will depend on what type of mortgage you have and when your current deal ends.

If you have a variable rate tracker mortgage, linked to the BoE base rate, your monthly payments are likely to immediately change (and go up).

People with fixed rate mortgages are likely to be affected once they reach the end of their current deal.

It’s good to have a plan in place so that if rates go up, you know how to cover the increased cost.

1. First, work out how much more your mortgage could cost each month. Use our Mortgage calculatorOpens in a new window to find out how much extra you’ll need to pay.
2. Track your current finances with our Budget plannerOpens in a new window. It can help you see where your money is spent and whether you can increase income and cut costs to meet the extra monthly cost.

If interest rates do go up, use our step-by-step guide Help with mortgage interest rates. It gives you a checklist to follow.

If you’re worried you might struggle to afford your repayments, talk to your provider or see our guide on Help with mortgage payments.

If rates drop, then your monthly repayments could also fall immediately if you have a variable rate.

If you’re paying back less each month, it’s worth thinking about what to do with the additional headroom in your budget by:

• creating a savings plan – this could help pay off your mortgage sooner or support you if rates went up
• overpaying – paying more than the minimum monthly repayment amount could also help. 

If you’re on a fixed term, then you will usually have to wait until it’s in its final six months to explore getting a new deal. You can do this with your existing lender by getting a product transfer. You may be able to change your deal early but you may have to pay an early repayment charge. You should get advice from a mortgage broker or financial adviser if you want to consider this.

Or you can shop around – start the switching process six months before your current deal ends. If you do decide to move elsewhere, you’ll usually need to wait until your current deal has ended to avoid early repayment charges.

Just be careful – you could secure a new deal now and then interest rates drop in the months before it starts. But you can then ask to switch if a better rate becomes available, under the ‘mortgage charter’. See our guide on remortgaging.

Rising interest rates can earn you extra on your savings. So it’s important to check what type of account you have and what your savings currently pay.

Banks don’t always increase your savings rate automatically when the interest rate goes up – so even if your bank has the best savings deal, you might not be on it.

Shop around to see if switching could make you more money.

For more help and information, see our guides:

• How to find the best savings accounts
• Interest rates explained

Interest rate changes also affect how much you’re charged to borrow money, like loans not secured on your home. The interest you’re charged depends mainly on how much you borrow and for how long, the type of loan you want and your credit score. But the base interest rate changing can affect this too. 

Any loans you’ve already taken out won’t usually be affected by an interest rate change because a fixed rate was agreed when you took out the loan.

Although credit card and overdraft interest charges can go up, they’re not linked directly to base rate changes.

Your provider must give you notice of any changes – and you can cancel the credit card as long as you repay the outstanding balance within 60 days (any interest added during that time will be at the lower rate). See our Simple guide to credit cards.

The rate of interest charged on personal loans may go up after an interest rate rise. So shop around and use our tool to see the different credit options available to you - Your options for borrowing money.

You can also put all the money you owe into one loan. But you need to consider this very carefully. Whether this is right for you depends on many things, including whether it will cover all of your current debts and bring down what your overall borrowing is costing you. Before you do anything else, see our guide on Debt consolidation loans.

If you’re coming up to retirement and about to buy an annuity, interest rate rises can be good news.

This is because annuity providers tend to buy government bonds and when interest rates go up, bond returns rise with them, boosting annuity rates. Annuity rates pay a guaranteed income for life or a fixed term. The income you receive can be locked in on the day you purchase your annuity (subject to indexing), so current annuity rates can make a big difference to your long-term financial security.

Find out more in our guide Guaranteed retirement income (annuities) explained.

People who have already taken out an annuity can’t switch. But you can still benefit from better interest rates by putting the money from the annuity into a savings account.