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The Impact of Rising Interest Rates in the UK

Published

July 28, 2023

As interest rates continue to be a hot topic, it’s crucial to understand their effect on mortgages, the economy, and personal finances. In this article, we explore the impact of rising interest rates and how they influence various aspects of the UK mortgage market. Additionally, we discuss how specialist finance solutions can serve as your compass during these challenging times.

How High Will UK Interest Rates Go?

Uncertainty looms over borrowers, with The Bank of England base rate currently at 5%. On one side, better than expected 7.9% inflation data has speculators calling for rates to remain the same (or even see a slight reduction). Others argue the decrease is not enough and anticipate another increase by 0.25% to ensure inflation continues in the right direction at a faster decline – with Andrew Bailey and the BoE targeting an annual inflation rate of 2%.

What is the Impact on UK Mortgage Rates?

Whilst we don’t have a crystal ball, we can make an educated speculation based on our experience within current market conditions. Those on variable rates are already feeling the incremental pinch, while those on their historical fixed terms are facing much larger jumps in their monthly payments when looking to renew. For example, if you were to refinance at an assumed 6.3% mortgage rate, landlords will be paying £525 per month whereas previously landlords would only be paying £166.67 per month*, ceteris paribus. This equates to an additional £4300 per year in mortgage payments.

Increased borrowing costs mean lowering yields for landlords, which slows demand for property, causing selling pressure on the housing market. This exacerbates the dilemma homeowners face as they can then only borrow against an asset that has now likely lost value.

Additionally, the availability of mortgage lending may decrease as lenders adopt a more risk-averse approach – which is why it’s vital to partner with active lenders that understand your desired investment outcome, as they are more likely to holistically assess your true affordability and offer you the best rates.

*Based on a £100,000 interest-only mortgage, with the initial fixed-rate at 2%.

What Are the Benefits of High Interest Rates in the UK?

As house prices begin to fall, cash-heavy investors find themselves in a buyers’ market, taking advantage of reducing house prices and less competition. Additionally, rising rates mean increased savings on cash, with some banks offering as much as 6% and climbing. However, we advise our clients to first look at their outstanding debt, especially if it’s unsecured. Lowering outstanding debt often outweighs the cash savings one would gain via a standard savings account.

How to Prepare for Rising Interest Rates in the UK?

Here are some key things to consider for managing your finances during a period of high interest rates:

  • Refinance your mortgage: If you have a variable-rate mortgage, consider refinancing into a fixed-rate mortgage to potentially save money.
  • Pay down debt: Prioritise paying down other debt, such as credit card debt, before interest rates rise even higher.
  • Cut frivolous spending: Consider cutting unnecessary expenses, such as buying morning coffee, upgrading your car, or purchasing luxury gifts.
  • Increase your savings: With rising interest rates, it may be wise to increase your savings as a financial cushion in case of emergencies.

Preparing for rising and uncertain interest rates requires foresight and expertise. At Provide Finance, we streamline the financing process through our fast-paced matching software to save you time and money. Our team of advisers offer tailored solutions for both business and property financing, guiding you through changing market conditions without any broker fees.

How Do High Interest Rates Affect the UK Economy?

Higher base rates are implemented to reduce consumer spending and control inflation. However, higher borrowing costs ultimately gets passed onto the consumer, or in the case of a landlords, their tenants. Stagnant wages and increased living expenses means less disposable income for most earners – slowing down business profits and economic growth. This makes it more difficult for tenants to save towards their own home, pushing up the demand for rental properties, and the dilemma continues to unfold.

What Are the Risks of High Interest Rates?

Businesses are in a tough position with reduced consumer spending and increased borrowing costs to perform their operations. Navigating these challenges requires advanced planning and a deep understanding of the tools available to assist businesses in managing their costs. The greatest risk, though, lies in ill-informed decision-making. Each financing scenario is different, which is why we emphasise the need for bespoke solutions tailored to your exact requirements, whether it be business or property finance.

As the impact of rising interest rates becomes evident in the UK, we believe in access to specialised information, without the broker fees. Our mission is to save our clients costs, deliver a personalised experience and revolutionise an industry hungry for growth.

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