Rising Anxiety: What to do about the interest rates increase

Updated 12 May 2023

Why have interest rates gone up?

The Bank of England has set a new interest rate of 4.5% - the 12th rise since December 2021. It's done this because inflation is the highest it’s been for 40 years.

What is inflation? 

Simply put, inflation is when the general price of goods and services goes up. When these prices rise, it means your money buys less. 

Inflation can happen when there aren't enough products or services to meet the demand for them, when the cost of producing these products or services rises, or when workers need higher wages to keep up with their increasing living costs. Inflation isn’t something that’s directly controlled, but interest rates are. 

Why do interest rates change?

When inflation happens, a country’s central bank responds by increasing its interest rate. They do this to encourage people not to borrow or spend, in the hope that they will save their money (because they can get more interest on their savings). The idea is that with fewer people spending their cash, the economy slows down a bit and inflation goes down again. 

The pandemic and the war in Ukraine has caused inflation in the UK to really grow, and many workers need higher wages to cover their rising living costs. There’s also shortages of manufacturing materials and skilled workers in some industries which is pushing up prices. The prices of everyday items have risen quickly, with wages lagging behind. On top of this, higher energy bills and national insurance hikes have pushed inflation right up - so the Bank of England is taking action to try and get things back to normal. 

What does this all mean in the real world?

Interest rates going up makes borrowing more expensive. It can have a knock on effect depending on your situation.

If you’re a first time buyer

If you’re a first time buyer, you might be worried about how the interest rate rise will affect your ability to get on the property ladder. If you’re paying interest on any credit card debts, personal loans or store cards then you might find your monthly payments increase, which could affect how much you can borrow. 

Don’t give up hope though. It could be a good time to prepare and get mortgage-ready. If you need a mortgage soon, certain lenders offer free valuations and no arrangement fees which can cut down on upfront costs. Getting advice from an expert will help your chances of finding the right lender and getting the most competitive mortgage deals. 

Talking about how the May 2023 rate rise might affect affordability and house prices, Adam Oldfield of Phoebus said:

“Although it’s not what anyone wanted to hear, today’s increase in base rate is as predicted. The trouble is that the fight to bring down inflation using interest rates has so far not proved to be particularly effective or speedy. We are all dealing with rising prices at every turn, and that is unlikely to change in the foreseeable future.

“The knock-on effect for the housing market is that with each rate rise, affordability becomes more of an issue for many borrowers, especially those on [the standard variable rate (SVR)]. The market has been particularly buoyant recently so it will be interesting to see if another rate rise makes potential buyers pause.”

If you’re a homeowner

If you’re currently on a variable/tracker mortgage or are coming to the end of your fixed-rate period, it might be time to think about remortgaging to get a more competitive deal. With energy prices still high, bringing down your mortgage payment is a good way to free up some cash each month, as it’s usually your biggest outgoing. 

You can use this as an opportunity to assess your financial situation and weigh up your options, which might include refinancing, consolidating debts, or extending your mortgage term. Some lenders are also offering free legal services and cashback incentives for remortgage customers. 

Before getting started, it’s best to speak to a specialist. Our Mortgage Experts can look at your options and find a remortgage solution. 

Think carefully before securing any other debts against your home - it could be repossessed if you don’t keep up your repayments.

How to get help if you’re struggling

If you're feeling the squeeze, there's help available: 

Energy bills

It’s expected that the cost of energy will continue to fall during 2023, although it will remain expensive. The government’s Energy Bills Support Scheme has now ended, but the Energy Price Guarantee remains in place until June 2023. This limits what households can be charged for units of gas and electricity, for an average household bill of £2,500 per year.

If you want to make your home more energy efficient, tax has been scrapped on energy-saving materials such as solar panels, insulation, and heat pumps. This has now also been rolled out in Northern Ireland.

The Citizens Advice Bureau has a detailed list of grants for energy bills such as the Warm Home Discount and Winter Fuel Payment. You can also chat to your water supplier - most can offer some sort of help. 

Fuel

In March 2022, fuel duty was cut by 5p a litre in an attempt to ease the pinch at the pumps. As of May 2023 it remains frozen at this level.

Income

If you receive welfare benefits, you may be able to get up to five 'cost of living payments' directly into your bank account. The National Insurance threshold was raised by £3,000 for 2022-23, and remains there for 2023-24. The Health and Social Care Levy, which increased NI contributions by 1.25% from April 2022, was reversed from April 2023.

Universal credit has replaced housing benefit, so you could apply if you need help with your rent. If you already claim benefits but don’t get housing costs covered, you could be eligible for a Discretionary Housing Payment through your local council. 

It can be hard to reach out in difficult times. If your financial situation is affecting you, it could be worth talking to a charity such as Mind, which does fantastic work supporting people dealing with mental health issues caused by money worries.

How we can help

We can’t fix the problem. But we can give you advice if you’re feeling stuck. If you're thinking about refinancing to free up cash, or considering buying, we can look at your options.

We’re experts in mortgages for bad credit, self-employed, and the tricky stuff. Difficult is what we do. So whether you’re a first time buyer who’s panicking about your options, or a homeowner thinking about remortgaging, let’s chat. 

Our Mortgage Experts have seen it all and aren’t judgemental. Make an enquiry to get started. It only takes 60 seconds and doesn’t affect your credit score.