The New Norm: What Higher Interest Rates Mean for Mortgages

Interest rates shape more than the price of borrowing.

They influence affordability, household budgets, property demand and the mortgage products lenders are willing to offer.

For more than a decade, many UK borrowers became accustomed to exceptionally low borrowing costs. That period changed rapidly after December 2021.

By November 2023, borrowers were facing a different mortgage market. Higher rates had become part of everyday financial planning.

This article explains what that “new norm” meant in 2023. It also examines the practical effect on mortgage applications, repayments and future refinancing decisions.

At a Glance

• Bank Rate rose from 0.10% in December 2021 to 5.25% by August 2023.
• Mortgage rates do not always move by the same amount as Bank Rate.
• Fixed-rate borrowers are usually protected until their current deal ends.
• Tracker and variable-rate borrowers may experience payment changes sooner.
• Higher rates can reduce mortgage affordability and available borrowing.
• Product fees, term length and total cost matter alongside the headline rate.
• Borrowers approaching the end of a deal should review their options early.
• A mortgage adviser can compare lender criteria, costs and product structures.

What Does “The New Norm” Mean for Mortgage Rates?

The new norm describes a mortgage market where very low interest rates could no longer be assumed.

Bank Rate remained below 1% from March 2009 until May 2022. Many borrowers, therefore, built their expectations around unusually cheap borrowing.

However, low rates were not a permanent feature of the UK economy.

They followed exceptional events, including the global financial crisis and the coronavirus pandemic. Monetary policy was used to support spending, borrowing and economic activity.

Conditions changed when inflation increased sharply during 2021 and 2022.

The Bank of England began raising Bank Rate in December 2021. It increased from 0.10% to 5.25% by August 2023.

Higher rates were intended to reduce inflationary pressure. However, they also changed the cost and availability of mortgages.

The practical lesson is simple. A mortgage rate should be treated as a temporary price, not a permanent entitlement.

Why Did UK Interest Rates Rise?

The Bank of England is responsible for maintaining price stability. Its inflation target is 2%.

Inflation moved well above that target during 2022.

Several pressures contributed:

• Higher energy prices.
• Increased food costs.
• Supply chain disruption.
• Labour shortages.
• Strong demand after pandemic restrictions.
• International economic and political uncertainty.

UK Consumer Prices Index inflation reached 11.1% in October 2022.

Increasing Bank Rate was one method used to reduce demand and control price growth.

Higher borrowing costs can encourage households and businesses to spend less. Reduced demand may then slow the rate at which prices increase.

However, this process is neither instant nor precise.

Interest rate changes can take time to affect mortgage borrowers, businesses and the wider economy.

Does Bank Rate Directly Set Mortgage Rates?

Bank Rate influences mortgage pricing, but it does not directly determine every mortgage rate.

Lenders also consider:

• Expected future interest rates.
• Wholesale funding costs.
• Swap rates.
• Competitor pricing.
• Deposit levels.
• Loan-to-value ratios.
• Credit risk.
• Product demand.
• Operational capacity.

Fixed mortgage rates can rise or fall before the Bank of England changes Bank Rate.

This happens because lenders price fixed products using expectations about future funding costs.

A lower Bank Rate does not therefore guarantee an immediate fall in every mortgage rate. The reverse is also true.

Borrowers should compare the complete product rather than focusing only on one economic announcement.

How Different Mortgage Rates Respond

The effect of higher interest rates depends on the borrower’s mortgage structure.

Borrowers can explore the main structures within the residential mortgage guide.

What Happens to Fixed-Rate Mortgage Borrowers?

A fixed-rate mortgage provides payment certainty for a defined period.

During that period, changes to Bank Rate will not normally change the contractual mortgage rate.

The main risk appears when the fixed period ends.

The mortgage may move onto the lender’s Standard Variable Rate unless another product is arranged. That rate could be considerably higher than the expiring fixed rate.

For example, a borrower leaving a low fixed rate may face:

• Higher monthly repayments.
• Different affordability requirements.
• New product fees.
• A revised property valuation.
• Fewer suitable lender options.
• Early repayment charges if they switch too soon.

Borrowers can read what happens when a fixed rate ends before reviewing their next step.

How Higher Rates Affect Mortgage Affordability

Higher interest rates can affect both existing borrowers and new applicants.

A lender must consider whether mortgage payments appear sustainable.

The assessment may include:

• Basic salary.
• Overtime or bonuses.
• Self-employed income.
• Credit commitments.
• Childcare costs.
• Household expenditure.
• Dependants.
• Mortgage term.
• Deposit size.
• Expected payment increases.

When mortgage rates rise, the same household income may support a smaller loan.

Lenders may also test whether an applicant could manage repayments at a higher assumed rate.

This process is often called stress testing. The exact calculation differs between lenders.

Prospective borrowers can review the principles behind residential mortgage affordability.

Connect Lifetime also provides a detailed explanation of how lenders assess mortgage affordability.

Why the Lowest Mortgage Rate May Not Be the Cheapest Deal

A headline rate does not show the complete mortgage cost.

A product with a lower rate may include a larger arrangement fee. Another product may have a slightly higher rate but lower initial costs.

The correct comparison may depend on:

• The mortgage balance.
• The initial product period.
• Arrangement fees.
• Valuation charges.
• Legal costs.
• Cashback.
• Early repayment charges.
• Mortgage term.
• Repayment method.
• The lender’s follow-on rate.

A £1,999 fee can have a very different effect on a £100,000 mortgage and a £600,000 mortgage.

Adding a fee to the loan can also increase the interest paid over time.

Borrowers should therefore consider the total cost during the chosen product period.

The quick mortgage calculator can provide an initial repayment estimate. It does not replace a personalised affordability assessment.

Should Borrowers Fix Their Mortgage Rate?

There is no universal answer.

A fixed rate can provide certainty. However, certainty may come with restrictions and early repayment charges.

A variable or tracker rate may offer greater flexibility. It can also expose the borrower to future payment increases.

The decision should consider:

• Monthly budget tolerance.
• Expected time in the property.
• Planned overpayments.
• Possible house moves.
• Future borrowing requirements.
• Income stability.
• Attitude towards changing payments.
• Early repayment charges.
• Product fees.
• Available financial reserves.

Choosing a mortgage is not simply a prediction about interest rates.

It is a decision about which risks a household can reasonably accept.

When Should a Mortgage Review Begin?

Borrowers should not wait until their existing mortgage deal has already ended.

Many mortgage offers remain valid for several months. Exact periods depend on the lender and product.

An early review provides time to:

• Check the current mortgage balance.
• Confirm the deal end date.
• Review early repayment charges.
• Estimate the property value.
• Calculate the loan-to-value ratio.
• Prepare income documents.
• Check the credit file.
• Compare remortgage products.
• Consider the existing lender’s product transfer.
• Review the complete cost of each option.

The remortgage guide explains the main steps when replacing an existing mortgage.

A separate Connect Lifetime remortgage guide covers refinancing and borrowing more against a property.

Remortgage or Product Transfer?

A remortgage normally means moving the mortgage to a different lender.

A product transfer means selecting a new deal from the existing lender.

Each route has practical differences.

A remortgage may involve:

• A full mortgage application.
• New affordability checks.
• A credit assessment.
• Property valuation.
• Legal work.
• A wider product comparison.

A product transfer may involve:

• Fewer affordability checks.
• Limited legal work.
• A simpler application process.
• Products from only the existing lender.
• Restrictions on changing the mortgage balance or term.

A product transfer may be practical, but convenience does not prove suitability.

The rate, fees, criteria and future plans should still be reviewed.

What Is the Mortgage Broker’s Role?

A mortgage broker cannot predict future interest rates with certainty.

Their practical role is to assess the options available under current market conditions.

This may include:

• Reviewing the borrower’s circumstances.
• Checking lender affordability rules.
• Comparing fixed and variable products.
• Calculating product fees and total costs.
• Reviewing early repayment charges.
• Checking loan-to-value limits.
• Assessing product transfer and remortgage routes.
• Explaining mortgage conditions.
• Preparing supporting documents.
• Monitoring an application through to completion.

A broker may also identify lenders whose criteria better match complex income, credit history or property circumstances.

The value lies in comparing evidence, criteria and cost. It should not depend on guessing the next Bank Rate decision.

The Deeper Meaning of the New Norm

Financial habits often form during stable periods.

When conditions change, yesterday’s expectations can become tomorrow’s risk.

The low-rate era encouraged borrowers to view cheap mortgage finance as ordinary. History shows that it was an exceptional period.

The new norm does not mean rates will remain at one level forever.

It means borrowers may need to plan for movement rather than permanence.

A suitable mortgage should work under present conditions. It should also leave room for foreseeable changes in income, costs and future plans.

Speak to Connect Mortgages

Higher mortgage rates changed the questions borrowers needed to ask during 2023.

The key question was no longer whether rates would return immediately to previous lows.

It was whether the mortgage remained affordable, suitable and properly structured under changing conditions.

Connect Mortgages can help you compare mortgage products, lender requirements and total costs.

Speak to a mortgage adviser before applying or changing an existing mortgage.

Frequently Asked Questions

Were mortgage rates historically high in 2023?

Rates were much higher than during the years following the financial crisis. However, UK interest rates had been higher during earlier decades.

The unusual feature was the speed of the increase after a prolonged low-rate period.

Will every mortgage payment increase when Bank Rate rises?

No.

Fixed-rate payments normally remain unchanged during the fixed period. Tracker and variable-rate mortgages may respond more quickly.

Does a lower mortgage rate always save money?

No.

Fees, cashback, legal costs and the initial product period can change the overall cost.

Can I remortgage before my fixed rate ends?

It may be possible to arrange a new mortgage before the existing deal ends.

Borrowers should check offer validity periods and any early repayment charge.

What happens if I take no action?

The mortgage may move onto the lender’s Standard Variable Rate after the current deal ends.

The lender’s terms will confirm what happens.

Can a broker guarantee that rates will fall?

No.

Future interest rates cannot be guaranteed. Advice should focus on suitability, affordability, costs and the borrower’s circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage or another loan secured against it.