7 ways to prepare for an interest rate rise

Interest rates are expected to rise yet again later this month as the Bank of England continues its efforts to calm inflation.

The anticipated hike – which is set to be the 11th consecutive increase in little more than a year – is a further blow to mortgage customers, as base rate rises tend to make borrowing more expensive.

Here, we analyse what higher interest rates mean for your mortgage repayments, and outline what steps you can take to prepare for any changes.

Why the Bank of England base rate impacts your mortgage

The base rate – set by the Bank of England's Monetary Policy Committee (MPC) eight times a year – plays a major role in determining the interest rates set by your mortgage provider.

When the base rate goes up, interest rates tend to follow suit. So, depending what type of mortgage you're on, a change in the base rate can impact your finances:

• Tracker mortgage: A change in the base rate will have a significant effect on your monthly payments. As the name suggests, these mortgages 'track' the Bank of England base rate, and also a set margin – for example, the base rate plus 1%. 
• Standard variable rate: A rate increase could significantly bump up your costs. Each lender sets its own standard variable rate (SVR), and this is the default interest rate that you'll be charged if you don't remortgage to a fixed-rate or tracker deal. While the base rate isn't built into how the rate is set, lenders will take a base rate rise into account, and likely hike their SVR.
• Fixed-term: A change in the base rate will not impact your monthly repayments as your deal is locked in for a set period of time. When you come to remortgage, however, you're highly likely to find that deals have become more expensive.

The graph below shows how the base rate influences fixed-term mortgage deals offered by lenders, according to Moneyfacts.

Will the base rate increase again?

Following on from 10 successive base rate increases, experts believe we will see yet another hike on 23 March after the MPC's next meeting.

At the last meeting in February, members voted by a majority of 7-2 to increase the base rate by 0.5 percentage points – taking it to 4%. It is anticipated the next rise will take it to 4.25%, however, without a crystal ball, no one can predict where we'll end up.

The committee sets the base rate as part of its efforts to keep inflation at 2%, yet the current figure of 10.1% towers above the target.

However, the Bank does expect inflation to start falling soon – to 3.5% at the end of the year, before dropping further to 1% in 2024. This could see the base rate dip in the coming months. 

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How to prepare for interest rate rises

While forecasters predict the base rate could fall in the second half of the year, it is poised to go up again this month.

Below, we look into seven ways you can prepare for interest rate rises as a mortgage customer:

1. Assess the impact on your finances

If you're on a tracker mortgage then, as mentioned above, you'll feel an immediate impact on your monthly repayments if there is an interest rate rise.

It's worth thinking about how much you can afford to pay each month and whether there's likely to be any change to your income in the short-term. 

If you're coming to the end of a fixed-term deal, then you're likely to be met with double or even triple the costs you currently pay when you come to remortgage.

If you're struggling or think you'll struggle to pay your mortgage, it's important to get advice as soon as possible. Speak to your lender and tell them about your issues – there are support options out there.

• Find out more: what to do if you can't pay your mortgage 

2. Figure out what deal suits you

If you're due to remortgage or are in the process of buying a property, you'll need to consider what type of mortgage to secure.

With interest rates potentially rising – and the future mortgage market being hard to predict – a sense of security could be appealing. That's why fixed-term deals are taken by the majority of homeowners, as mortgages aren't impacted by interest rate hikes for the duration of the term. The most popular terms last for two, five and 10 years.

Tracker mortgages are more of a gamble if the base rate were to continue to rise significantly. You could be in luck as and when the interest rate falls, but note that tracker deals often come with a 'collar', which specifies the minimum rate you can pay. Even if the base rate falls dramatically, you won't pay less than the collar. 

3. Consider overpaying your mortgage

This won't be an option for everyone, but for those with a repayment mortgage (as opposed to an interest-only deal), one way to beat the impact of an interest rate hike is to drive down the cost of your loan. 

You can do this by overpaying your mortgage, which can potentially save you thousands in the long-run.

Overpaying increases your equity in the property – that is, the proportion of your home you own – meaning you can benefit from lower interest rates when having to get on a new deal, as it will be at a lower loan to value (LTV). This essentially means there will be less of your mortgage outstanding when you need to get a new deal.

It's the norm for lenders to allow you to make overpayments of up to 10% per year, but larger overpayments may incur a penalty. However, NatWest has recently doubled its annual overpayment allowance to 20%.

• Find out more: how do mortgage overpayments work?

4. Be wary of your lender’s SVR

If you're one of the 1.4 million homeowners whose fixed-term mortgage is coming to an end this year, you should be proactive in hunting for a new deal.

If your fixed-rate or tracker deal ends, you'll usually be automatically moved onto your lender's SVR, where the interest rate will likely be higher. The rate can also be increased at any time, irrespective of what is happening with the base rate. 

But before this happens, you have a window to lock in a new deal before your existing one ends. Depending on the lender, you can secure a new deal up to six months in advance. 

Getting a new mortgage locked in before an interest rate hike – and avoiding going on an SVR – could making savings on your repayments.

• Find out more: read our guide on SVR mortgages

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5. Act quickly to get the best deals

In the same vein as above, if you're in the process of buying a property – or if your mortgage is up for renewal – you might not be able to hang about if you want to secure a competitive new mortgage deal. 

The cheapest deals are now below 4%, but many aren't staying on the market for long. Platform and the Co-operative Bank's market-leading 3.75% deals for 60% LTV were recently pulled, while Nationwide also recently withdrew its sub-4% offers. This may be due to high demand, or lenders pricing in the likely forthcoming base rate rise early.

So, should you find a competitive deal you're happy with, you might want to act quickly before it disappears.

If you sign up to a new deal a number of months in advance, be sure to check the provider's terms. If you spot a better offer elsewhere before the new mortgage deal starts, some lenders allow you to switch to a cheaper offer right up until you officially remortgage, while others won't allow you budge. 

• Find out more: the best mortgage deals on the market now

6. Can you save by switching mid-deal? 

Even if you're in the middle of a fixed-term deal, in some cases it may be worth switching before the term is up if you want to secure a deal before further base rate rises. 

You'll need to factor in the possibility of having to pay an early repayment charge (ERC), which could be a significant sum depending on the terms of your mortgage deal.

However, if you've done the maths and figured out that you can save money by switching, it should be up for consideration.

Speaking to an impartial mortgage broker could help you decide on the best course of action.

• Find out more: how to remortgage

7. Improve your credit score

Your mortgage repayments can also be influenced by your credit rating. Those with poor credit scores who are due to remortgage could end up paying a premium, particularly if the base rate has just increased.

To address this now, you can improve your credit rating by doing a number of things – such as updating your address, correcting any mistakes on your credit report, and getting on the electoral roll.

• Find out more: 16 ways to boost your credit score