Are interest rates rising and what does it mean for me?

Are interest rates going up?

Although interest rates are currently above the typical 4-5% mark and have seen some recent rises, they are now on a downward trend. The average 2-year fixed rate mortgage is now 5.40%, while the average 5-year fixed rate is 5.07%, down from 5.49% in July. Plus, what rate you'll be offered is also impacted by your downpayment and eligibility. For borrowers with a 10% deposit for example, the best available rate from our panel of 100 lenders is 4.29% for a 5-year fix - significantly lower than the average rate.

Even if you can't get a rate as low as this right now, there is good news. Inflation has been gradually coming down and has now gone below the Bank of England's 2% target which they set two years ago. This is why the Bank of England cut its base rate to 5.0% earlier this year, and could cut it again, which should cause mortgage lenders to also reduce their own rates.

*Based on 90% LTV, with a 35-year mortgage term. Interest rates are accurate as of October 2024.

Why are interest rates high?

Interest rates are higher than the typical 4-5% because the Bank of England repeatedly voted to keep the base rate high - currently it stands at 5.0%. This is to curb inflation - keeping the base rate high increases borrowing costs, making loans more expensive. This was intended to reduce our disposable income so that we all spend less on goods and services. This reduction in demand then means companies reduce prices, or at least not increase them as quickly, which in turn brings inflation down. By keeping the base rate high, the Bank of England also increases the amount it charges other banks to borrow money. Because it's more expensive for them to borrow money, banks typically increase their own interest rates as a result.

Why is the base rate high?

The base rate increased multiple times over 2023 because the Bank of England was trying to stop consumers from spending and borrowing as much. By keeping the base rate high the Bank of England has been trying to slow down consumer activity, which means companies can’t increase their prices so quickly. So far this has been working, reducing inflation from the 11.1% peak in October 2022 to 2.0%. Now that inflation has fallen, the Bank has begun to cut the base rate, starting in August 2024 by cutting it to 5.0%.

How high will interest rates go?

Despite staying stagnant over the last few months, inflation has begun to come back down again. If this continues for the rest of 2024, interest rates shouldn't go up, and instead should come down. However, it’s likely we won’t see sub-4% mortgage deals as standard until the end of 2024 or even longer.

How do rising interest rates impact first-time buyers?

When interest rates rise, this makes mortgages more expensive as it increases the amount of interest you pay each month alongside paying off your mortgage loan. If you're a first-time buyer, higher interest rates might mean that you have to borrow less for a mortgage in order to afford the monthly repayments or put down a larger deposit to get a lower LTV. If you're still saving towards your first home, high interest rates can be a good thing however if saving rates are also high, as you could earn more money on your savings.

If you're struggling to save for a house, don't worry. Set up a Cash Lifetime ISA with us today to benefit from our market-leading 4.75% AER (variable) interest rate, plus a free 25% bonus from the government. There are also ways to buy a home with a small deposit, as well as schemes that help you boost your deposit size.

You might also like: Best mortgages for first-time buyers

Learn more about how interest rates work in our What are mortgage interest rates? guide.

How do rising interest rates impact homeowners?

If you already own a home, the rising interest rates will only impact you if you are coming to the end of your current fixed rate deal and are looking to remortgage, or you are on a variable rate. Over 1.4 million households are facing repayment rises this year once they remortgage onto a new deal. In fact, the average household looking to remortgage next year could see a £2,900 increase to their repayments.

So if you're worried about your mortgage costs rising, you're not alone. The good news is, if you're struggling to remortgage you're in the right place. At Tembo, we're experts in helping homeowners increase their affordability so they can access lower interest rates and stay in the home they love. To find out what remortgage rates you could get, create a free Tembo recommendation, personalised to you.