How Much Will My Mortgage Go Up

The Bank of England has just announced another interest rate hike, and you may be wondering, "How will this impact my mortgage payments?" Interest rate increases can leave UK homeowners concerned about rising monthly costs, potentially straining household budgets and affecting future financial plans. 

Understanding how these changes work, calculating their impact, and finding ways to manage them can make all the difference in staying ahead of rising mortgage payments.

In this blog, we will guide you through the reasons behind these rate hikes, explain how to calculate their impact on your mortgage, and explore strategies to effectively manage increased costs. With the right knowledge, you can make informed decisions and be better prepared for any changes in interest rates.

Interest rate trends and how they affect mortgages

Interest rates fluctuate for a variety of reasons, many of which are tied to broader economic trends. The Bank of England often raises interest rates to combat rising inflation or to stabilise a rapidly growing economy. 

Inflation, employment levels, and global financial uncertainties all play significant roles in determining the direction of interest rates. It’s important to understand that these factors are interconnected, and even seemingly small shifts can have far-reaching impacts.

For instance, the Bank of England may raise interest rates when inflation is high to encourage saving and reduce spending, thereby cooling down the economy.

Conversely, during periods of low inflation or economic downturns, they may lower rates to encourage borrowing and stimulate economic activity. Employment levels are another key factor; when employment is high, consumer spending tends to rise, which can push inflation up and, in turn, lead to higher interest rates. 

Global economic factors, such as geopolitical tensions or disruptions in supply chains, can also prompt the Bank of England to adjust rates.

When interest rates increase, mortgage holders often feel the effects almost immediately. Even small increases can make a big difference in monthly repayments. 

Let’s take an example: A mortgage of £200,000 with a 3% interest rate might mean a monthly repayment of £950. If the interest rate rises to 4%, the payment could increase to around £1,050. A change of just 1% results in an extra £100 per month. Understanding these dynamics can help UK borrowers stay informed, proactive, and prepared for changes.

How to calculate mortgage payment increases

Knowing how much your mortgage will increase due to a rate rise is critical to making sound financial decisions. Calculating the potential increase in your payments helps you assess your current budget and figure out if adjustments are needed to accommodate the new costs. 

The best way to calculate this is by using a mortgage repayment calculator, which is widely available online. These calculators let you input your loan amount, interest rate, and repayment term to estimate what your payments might look like after a change.

Let’s walk through a few examples to better illustrate this. Imagine you have an interest-only mortgage of £150,000 with an initial interest rate of 2.5%. Your monthly interest payment would be approximately £312. If that rate were to increase to 3.5%, your payment would rise to about £437—a jump of £125 per month. 

While this may not seem dramatic at first glance, over a year, that’s an additional £1,500. This is why understanding potential increases is crucial—having this information allows you to adjust your financial plans accordingly, such as by setting aside extra savings or reducing discretionary spending.

Another scenario could involve a repayment mortgage. Suppose you have a repayment mortgage of £250,000 over 25 years at an interest rate of 3%. Your monthly payments might be around £1,186. If the interest rate increases to 4%, your payments would rise to about £1,320—a difference of £134 each month. 

Mortgage calculators can be extremely helpful tools to run through such scenarios and prepare for possible changes.

Strategies to manage rising mortgage payments

Rising mortgage payments don't have to be a dead end—there are several strategies that can help you manage these increased costs and stay in control of your finances. Here are some practical steps you can take:

Switch to a fixed-rate mortgage

One effective way to manage rising mortgage payments is by switching from a variable rate to a fixed-rate mortgage. With a fixed-rate mortgage, you can lock in your payments for a set period, which shields you from further interest rate increases during that time. 

This kind of stability is particularly beneficial in uncertain economic periods when interest rates are likely to rise again.

Make overpayments

If your current financial situation allows, consider making overpayments on your mortgage. By paying a bit more each month, you reduce the overall balance, which means you’ll pay less interest over the long term. 

Many lenders allow overpayments of up to 10% per year without penalty, but it’s worth checking the specifics of your mortgage agreement.

Remortgaging

Remortgaging involves switching your current mortgage to a new deal, either with your existing lender or a different one. This can help you secure a better interest rate or more favourable terms, especially if your current deal is ending. 

Remortgaging can save you money by reducing your monthly payments or enabling you to fix your rate before further increases.

Extend the mortgage term

Extending the term of your mortgage can also be a way to manage increased payments. While this will reduce your monthly payment, it’s important to note that it could increase the total amount of interest you pay over the life of the mortgage. 

This option might work well for those experiencing a temporary reduction in income and needing lower monthly costs for a period.

Consult a mortgage adviser

Speaking with a mortgage adviser can provide you with tailored options suited to your specific financial situation. Mortgage advisers have access to a wide range of products and can help you find the best solution for managing increased costs.

Economic factors that influence interest rates

To stay ahead of mortgage rate changes, it’s helpful to understand the broader economic factors that influence them. Inflation plays a significant role in determining interest rates. When inflation rises, the Bank of England often responds by increasing interest rates to keep the economy in balance. 

High inflation means prices for goods and services are increasing, which reduces the purchasing power of money. By raising interest rates, the Bank of England aims to reduce spending, curb inflation, and stabilise the economy.

Employment rates also have a direct impact on interest rate decisions. When employment levels are high, more people have disposable income, which leads to increased spending. This can contribute to inflationary pressures, prompting the Bank of England to raise interest rates to cool down the economy. 

Conversely, during times of high unemployment, interest rates may be lowered to encourage borrowing and spending, thereby stimulating economic growth.

Global economic factors also play a part. For example, geopolitical tensions, trade disruptions, or significant events in major economies can lead to uncertainty, which often impacts interest rates. 

For instance, during a financial crisis, the Bank of England might lower interest rates to stimulate the economy, whereas during periods of strong economic growth, they might increase rates to prevent overheating.

There is no crystal ball for predicting exactly how much rates will rise or when, but understanding these factors can give you an insight into potential changes. Keeping an eye on Bank of England announcements, inflation reports, and employment data will help you anticipate future rate movements and take proactive steps.

Your next steps for managing mortgage increases

Rising interest rates can feel daunting, but they don’t have to catch you off guard. By understanding how economic factors influence your mortgage, using tools like repayment calculators, and implementing strategies such as fixing your rate or making overpayments, you can take charge of your mortgage and keep your finances on track.

If you’re interested in seeing how much your mortgage could increase, take advantage of our mortgage repayment calculator to explore different scenarios. The Lending Channel is here to support you every step of the way. We offer tailored mortgage advice to help you make the best financial decisions for your circumstances, ensuring that you’re always prepared, no matter how the economic landscape changes.

For more information or to speak with one of our mortgage advisers, contact us here. We're here to help you make informed decisions about your mortgage, giving you peace of mind in an ever-changing financial world.