In June, the Bank of England increased interest rates for the 13th consecutive time to bring inflation back to its target rate of 2%. Currently, the base rate of interest is set at 5%. Meanwhile, UK inflation has declined from its peak of 11.1% in 2022 to 8.7% in the period up to May 2023.
When it comes to interest rates, we are all sailing in the same boat in terms of the current economy. That said, it also depends on what sort of rate you are currently on. If you hold a variable-rate mortgage, an increase in interest rates will result in higher monthly payments. Therefore, exploring measures to ensure your ability to handle increased repayments is prudent.
One crucial aspect that many fail to consider is their current level of affordability. You may already be teetering on the edge, where any further rate increase could lead to financial strain. It is always wise to assess your wiggle room and avoid being caught in a situation that could cause a financial tsunami.
By taking proactive steps to assess your financial situation and plan for potential interest rate fluctuations, you can gain peace of mind and protect yourself from any unexpected financial burdens. In an inflation period, it is essential to be prepared and consider measures to maintain financial stability in the face of rising interest rates.
How is inflation measured?
When economists at the Office for National Statistics (ONS) analyse the inflation rate in the UK, they examine the changes in prices for a selection of products compared to the previous year. Up to May 2023, the inflation rate measured by the Consumer Price Index (CPI) stood at 8.7%. This calculation was based on a selection of approximately 180,000 products and services that reflect typical consumer spending patterns.
By monitoring the price fluctuations of this basket of goods, the CPI provides a widely used indicator of inflation trends. In addition to the CPI, another measure of inflation is the retail prices index (RPI).
Like the CPI, the RPI also utilises a basket of goods and services and incorporates mortgage interest payments.
During the same period leading up to May 2023, the RPI inflation rate reached 11.4%. To understand the disparity between RPI and CPI inflation, it is important to assess the differences between these two measures.
The knock-on effect
Recently, inflation and interest rates have dominated economic discussions. The government is working to manage rising inflation. Households across the UK are adjusting to increased costs for essentials and non-essentials. Mortgage holders face additional challenges due to measures aimed at controlling inflation.
The Bank of England must tackle high inflation by raising interest rates. These rate increases directly affect mortgage repayments and long-term borrowing costs.
The table below shows how rising interest rates could impact a typical customer. It aims to clarify the financial effects of interest rate changes.
The example below illustrates how interest rate increases may affect a standard interest-only mortgage. It highlights the impact of various rate rises on monthly repayments.
- Mortgage Balance: £100,000
- Remaining Term: 10 years
- Current Rate: 5.85% (example rate)
- Current Month payment: £488
Rate Rise |
Increase in Monthly Payment |
| 0.5% | £41 |
| 1% | £83 |
| 2% | £166 |
Now let’s examine how different rate rises can affect a typical repayment mortgage:
- Mortgage Balance: £100,000
- Remaining Term: 10 years
- Current Rate: 5.85% (example rate)
- Current Month payment: £1,103
Rate Rise |
Increase in Monthly Payment |
| 0.5% | £25 |
| 1% | £50 |
| 2% | £102 |
The analysis highlights the effect of interest rate increases on mortgage repayments. The table shows how even a slight rise in interest rates can lead to higher monthly payments. For example, with a typical interest-only mortgage, rate increases of 0.5%, 1%, and 2% result in additional payments of £41, £83, and £166, respectively.
These rate rises for a standard repayment mortgage would lead to extra monthly payments of £25, £50, and £102. Borrowers must consider the impact of such changes and assess their ability to manage future rate increases. Taking early steps to evaluate affordability helps borrowers remain prepared for potential fluctuations in interest rates.
Worried about a change in the interest rates?
Our online quick Mortgage Calculator is a helpful tool that shows how interest rate rises might affect your mortgage. The calculator reveals how rate changes could impact your monthly payments by entering details such as your mortgage balance, remaining term, and current interest rate.
This tool is vital for understanding potential financial changes and helps you make informed decisions about your mortgage. Whether you are considering refinancing, preparing for rate changes, or exploring various scenarios, our Mortgage Calculator allows you to assess the effects of interest rate rises and manage your mortgage planning effectively.
Want to make overpayments?
Making overpayments is a smart way to repay your mortgage faster and reduce interest costs. Our mortgage services allow you to make extra payments towards your loan balance, helping you save money and shorten the repayment term.
Overpayments enable you to build equity more quickly and achieve mortgage freedom sooner. Our experienced team is available to guide you through the process, answer your questions, and help you optimise your repayment plan.
Take control of your mortgage today by making overpayments and reducing your financial commitments sooner.
Help and support
At Connect Mortgages, we recognise that life can present unexpected challenges requiring immediate support. We are dedicated to assisting our clients during difficult times.
Personalised Guidance for Your Needs
If you are facing financial difficulties, experiencing personal changes, or need advice about your mortgage, our experienced team is ready to help. We focus on your well-being and aim to deliver solutions tailored to your needs.
Exceptional Support During Difficult Times
We take pride in offering exceptional support during challenging periods. Our skilled and compassionate advisers will work closely with you to assess your circumstances and explore suitable options. We are committed to building strong relationships based on trust and understanding.
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We believe everyone should have access to the help they need, regardless of their situation. Our goal is to remain a dependable resource for clients by providing tailored guidance and solutions.
Facing Financial Pressures Together
When challenges arise, you do not have to face them alone. Trust Connect Mortgages to support you through rising costs and financial pressures. Together, we can find solutions and work towards a more secure future.
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