How to prepare for mortgage rates going up

Published  24 July 2023
   5 min read

If you’re worried about rising mortgage rates, you can’t pay your mortgage or you’re looking for a new deal, how can you prepare and what help is available?

Why are mortgage rates going up?

The Bank of England sets the base interest rate, which affects the interest rates that banks charge borrowers and pay savers. The Bank is also responsible for keeping inflation (price and cost rises) low, but in December 2021, it started increasing interest rates because inflation was rising. The interest rate rises that have followed since have meant that mortgage rates for millions of people have also increased.

What happens when mortgage rates go up?

When interest rates rise, whether your mortgage rate rises depends on the type of mortgage you have. There are several different types of mortgage deal, but the main ones are:

  1. Fixed-rate mortgage. This type of mortgage charges a fixed rate of interest throughout the period of the deal (typically two, three or five years).  The interest rate and your monthly payments will not change during the fixed period. Most mortgage borrowers have a fixed-rate mortgage.

  2. Standard variable rate (SVR). This type of mortgage generally rises and falls when the Bank of England changes the base rate, but not necessarily by the same amount or at the same time. The standard variable rate is the one you will be on after you have come to the end of a deal, if you’ve not taken out a new one.  

  3. Tracker rate mortgage. This type of mortgage tracks the Bank of England base rate, so when the base rate rises and falls, the tracker mortgage rate will change by the same amount.

  4. Discount rate mortgage. Here the interest rate is a fixed percentage, for example – 0.5% or 1% - below the standard variable rate. When the Bank of England raises or reduces the base rate, your discount mortgage is also likely to rise or fall, but not necessarily by the same amount.

Tips for managing a mortgage interest rate rise

If you are on a variable rate, your mortgage interest rate may have been rising as the Bank of England increased rates and you are now paying a lot more than you were previously. Or your fixed rate deal might have come to an end and the increase in your mortgage interest rate could be very steep. Some borrowers took out fixed rate mortgages at below two per cent, and face sharply higher payments when they come to get a new deal.

Whatever your situation, there are several steps to consider:

  • Getting a new mortgage deal. One of the big decisions is whether to opt for a fixed rate mortgage deal or to take out a variable rate mortgage (such as a tracker or discount rate). There are pros and cons to taking out a fixed rate mortgage compared to a variable rate one. Fixed rate mortgages may be worth considering if you want certainty about how much your monthly mortgage payments will be. However, they may be less flexible especially if, for example, you’re considering moving within the fixed rate term. Variable rate mortgages (including tracker and standard variable rates) are more flexible, but don’t offer you certainty about how much your monthly mortgage payments will be.

TIP: Choosing between a fixed or variable rate mortgage and, if you opt for a fixed rate deal, how long to fix for, may not be straightforward. None of us knows how much higher mortgage rates will rise and when they will start to come down. It can be helpful to think about how your finances would be affected if, for example, you were to choose a variable rate mortgage (such as a tracker mortgage) and interest rates were to continue rising above current expectations. Would you still be able to able to afford your mortgage payments? The mortgage deal you take could have a significant impact on your finances, which is why it is a good idea to talk to an impartial mortgage adviser who can explain the options to you.

  • Looking at your budget. If your monthly mortgage costs have risen or are due to rise, it’s worth looking at your budget, or drawing one up, if you don’t already have one. A budget is a list of money you have coming in and money you spend, with your spending split into categories. These could include essential bills, travel costs, food, debt repayments and non-essential spending, such as clothes and eating out. Having a budget can make it easier to see where you can make cutbacks. You can read more in our money guide on budgeting.
  • Increasing your income. You may be able to increase your income by, for example, doing overtime or an additional job. However, this may not be possible, especially if you have caring responsibilities or other commitments. If you have a spare room, you may want to consider renting it out. It’s a big step, so needs some serious thought, and you would have to get permission from your mortgage lender and tell your home insurer as well (and landlord, if you live in a leasehold property). You can earn up to £7,500 a year tax-free from renting out your room. You can find out more about the so-called ‘Rent a room’ (opens in a new window) scheme on the website.

What happens if you can’t pay your mortgage?

Contact your mortgage lender if you’re worried about missing a mortgage payment, or if you’ve missed one or more monthly mortgage payments. If you have a mortgage adviser, talk to them before making any decisions about your mortgage.

There may be options that your mortgage lender can offer you to reduce your monthly mortgage payments. These include extending your mortgage term or switching from a repayment mortgage (where your monthly payments pay the interest and part of the original amount you borrowed, called the capital) to an interest-only mortgage (where your monthly payments cover the interest but do not repay the capital), for a limited period.

All mortgage lenders have agreed to offer a range of support for people who are worried about higher mortgage payments and most mortgage lenders (covering over 90% of the market) have signed up to a ‘mortgage charter’, which offers some extra support.

All lenders have agreed the following:

  • Anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file.
  • If you are up-to-date with payments, you can switch to a new mortgage deal at the end of your existing fixed rate deal without another affordability check (as long as you don’t want to borrow more, switch from one repayment type to another or extend your mortgage term).
  • Lenders will provide well-timed information to help customers plan ahead if their current rate is due to end.
  • Lenders will offer tailored support for anyone struggling. This could mean extending the mortgage term to reduce your monthly payments or offering a switch to interest only payments. It could also include a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the customer’s circumstances.

Following meetings with the chancellor, many of the mortgage lenders have agreed to a ‘mortgage charter’, which includes a range of measures designed to help people who may be worried about their mortgage. These are on top of the measures explained above:

  • From June 26, if you’ve missed a mortgage payment, your mortgage lender will not force you to leave your home without your agreement for up to 12 months, except in exceptional circumstances.
  • From July 10, if you’re approaching the end of a fixed rate deal, you will have the chance to lock in a new deal up to six months ahead. You will also be able to ask for a better like-for like-deal with your lender right up until your new term starts.
  • If you are up to date with your mortgage payments, you will be able to switch to interest-only payments for six months or extend your mortgage term to reduce your monthly payments. Your lender won’t need to carry out an affordability check and it won’t affect your credit score. If you want to go back to your original mortgage term, you will have to contact your lender within the six-month period.  

Your lender can tell you whether or not they have signed up to the mortgage charter, or you can check on the website (opens in a new window).

If you’re struggling, paying lower mortgage payments for a few months could help you get back on your feet financially, but you are likely to end up paying back your mortgage for longer and you could pay more interest overall.

Getting more help with arrears

If you have other debts or bills that you are struggling with, it’s a good idea to contact a free to use debt advice service, such as StepChange, Citizens Advice or National Debtline, which you can normally do online or by phone. They’ll be able to talk you through the best way to deal with your mortgage debt. You should definitely get in touch with a debt advice charity straight away if your mortgage lender says it’s applying to court, you’ve been sent court papers or if you’ve been told that bailiffs are being sent to your home.